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Novum Alpha - Weekend Edition 9-10 October 2021 (10-Minute Read)

U.S. jobs missed their monthly target for the second time in a row, signaling a weakness in the labor market that economists and the U.S. Federal Reserve had hoped was transient. The timing of the missed job numbers could not be worse as it comes just as the Fed is looking to dial back stimulus and gradually shift to a more normal monetary policy. 

A wistful weekend to you as stock inevitably wound lower towards the end of a volatile week. 
 

In brief (TL:DR)

 
  • U.S. stocks finished Friday in the red with the Dow Jones Industrial Average (-0.03%), the S&P 500 (-0.19%) and the tech-centric Nasdaq Composite (-0.51%) all lower as U.S. jobs data miss the mark. 
  • Asian stocks continued their ascent on Friday as fears over the depth and extent of Beijing's crackdown on various sectors eased. 
  • Benchmark U.S. 10-year Treasury yields continued their advance to 1.613% on expectations that missed jobs targets will justify the Fed's continued intervention in the markets (yields rise when bond prices fall).
  • The dollar slipped. 
  • Oil held gains with November 2021 contracts for WTI Crude Oil (Nymex) (+1.34%) at US$79.35. 
  • Gold was flat with December 2021 contracts for Gold (Comex) (-0.10%) at US$1,757.40.
  • Bitcoin (+0.87%) continued to gain into the weekend at US$54,909 as outflows continue to lead inflows (outflows typically signal that investors are looking to hold Bitcoin in anticipation of higher prices). 

 

In today's issue...

 
  1. Chinese Food Delivery Giant Meituan Gets Slap on the Wrist
  2. Family Offices Begin to Resemble VCs 
  3. White House Gets Serious About Cryptocurrencies 

 

 

Market Overview

 
U.S. jobs missed their monthly target for the second time in a row, signaling a weakness in the labor market that economists and the U.S. Federal Reserve had hoped was transient. 
 
The timing of the missed job numbers could not be worse as it comes just as the Fed is looking to dial back stimulus and gradually shift to a more normal monetary policy. 
 
Hiring in leisure and hospitality nearly doubled, owing to seasonal trends, but were insufficient to offset job losses in the government sector as federal, state and local governments all cut back on their budgets and headcount. 
 
Job growth has become anemic, with September's payrolls advancing the lowest in the entire year. 
 
In Asia, markets finished Friday up as concerns over job growth in the U.S. were pushed aside by relief that Beijing has demonstrated some restraint in its crackdown of the private sector, with Tokyo's Nikkei 225 (+1.34%), Hong Kong's Hang Seng (+0.55%) and Sydney’s ASX 200 (+0.87%) up, while Seoul's Kospi Index (-0.11%) was down slightly.
 

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1. Chinese Food Delivery Giant Meituan Gets Slap on the Wrist

 
  • Investor worries eased by the fine of Chinese food delivery leader Meituan (+2.07%) on antitrust violations 
  • More equitable working practices, better benefits for gig workers and a fairer division of fees for restaurants will ultimately benefit Meituan in the long run 
 
Better to pay a fine than to do hard time, or worse, face a bust up.
 
In growing signs that Beijing doesn’t intend to eviscerate its private sector, food delivery giant Meituan was slapped with a US$533 million fine for violating anti-monopoly regulations, ending a months-long probe that had cast a long shadow on the company.
 
The Chinese State Administration for Market regulation imposed the fine amounting to just 3% of Meituan’s 2020 domestic revenue, equivalent to a slap on the wrist.
 
Meituan will gladly take the slap as well as return some US$200 million of deposits stemming from exclusivity arrangements, in exchange for continuing to operate and in many ways, dominate the food delivery landscape in China.
 
Meituan has prospered as pandemic restrictions saw more Chinese order in, but has also been subject to allegations of unfair business practices which exploit both delivery drivers and restaurants alike.
 
Investors are likely to receive the Meituan news with a sigh of relief, given Beijing’s intensifying scrutiny over the treatment of millions of blue-collar workers that power China’s gig economy, often with almost no benefits and limited protections.
 
The lower-than-expected penalty for Meituan will ease concerns for other monopolistic businesses in China as President Xi Jinping continues his push for “common prosperity” and could see a recovery for Meituan which has shed 40% from its peak in February.  
 

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2. Family Offices Begin to Resemble VCs

 
  • Family offices looking to generate returns are increasing investments in startups 
  • Family offices are well-placed to advise and invest in startups, which can leverage their longer term investment horizon, substantial connections and wealth of experience 
 
Forget Sand Hill Road, a growing number of promising startups from industries including fintech and healthcare are looking to wealthy individuals and family offices to raise funds.
 
According to research from SVB Capital and Campden Wealth, family offices made up 4.2% of the roughly 23,000 venture capital deals worldwide this year through the end of August, over double their share a decade ago.
 
Total capital invested into venture capital deals hit a whopping US$418 billion this year till August, surpassing the record US$333 billion for the whole of 2020 and can be attributed to the surging growth of assets among the wealthy.
 
In the wake of unprecedented fiscal and monetary stimulus, the assets of the global wealthy has surged.
 
Low interest rates and yields have also led to a more desperate pursuit for returns, with family offices, which traditionally focus on preserving wealth for future generations, forced to start looking into alternative assets from private equity to cryptocurrencies.
 
Although the SVB Capital and Campden Wealth survey of 139 rich families and family offices revealed that deals were done through a mix of direct investments and VC funds, more family offices are striking out on their own.
 
Man Capital, the investment firm of Egypt’s billionaire Mansour family established 1984 Ventures just four years ago but already boasts over two dozen startups in its portfolio.
 
Although family offices may lack experience in dealing with startups, their investment horizons, which often span far longer than your average pension fund or other types of institutional investors make them a good fit with young companies.
 
Often the expertise and experience, as well as the wealth of connections and network of family offices can assist startups at various stages of growth.
 
Their longer investment horizons also suit startups which are increasingly staying private for far longer and more often than not are going down the M&A route as opposed to a public listing and the scrutiny which an IPO typically attracts and that suits family offices, for whom privacy is paramount. 
 
 

3. White House Gets Serious About Cryptocurrencies

 
  • Biden administration allegedly looking to develop a more comprehensive framework to tackle and regulate cryptocurrencies 
  • Move by the White House would be welcome to avoid the piecemeal and inconsistent application of current regulations to cryptocurrencies 
 
Given that the combined market cap of all cryptocurrencies at around US$2.3 trillion is barely a fraction of the total value of derivatives traded in a single day, estimated at around US$12 trillion, the amount of regulatory scrutiny that the sector attracts has been growing far out of proportion to its impact on the financial markets.
 
Nevertheless, that hasn’t stopped authorities from Beijing to the Biden administration from tightening the regulatory noose around the sector.
 
The White House is now weighing an executive order on cryptocurrencies as part of an effort to set up a government-wide approach to reign in the nascent asset class, according to Bloomberg sources.
 
Although the Biden administration has shown an appetite to regulate cryptocurrencies, the proposed directive would settle once and for all which federal agencies would have jurisdiction over which specific areas and offer recommendations on regulating the space.
 
The Biden administration initiative also aims to coordinate inter-agency cooperation to work on cryptocurrencies through the executive branch, including departments that had otherwise ignored the sector altogether.
 
The U.S. is the world’s number one cryptocurrency trading market and regulators are warning that the burgeoning market for digital assets, which is largely unregulated and lacks many basic investor protections, increasingly poses a systemic risk to financial stability.
 
U.S. national security agencies are also grappling with the high-profile use of cryptocurrencies in ransomware attacks and to fund terrorism.
 
The lack of clear operating theaters has also seen agencies jostle for jurisdiction over cryptocurrencies, with the most aggressive being the U.S. Securities and Exchange Commission, helmed by the crypto-savvy Gary Gensler.
 
A powerful lobby group has also built up in Washington, with the cryptocurrency industry stakeholders pushing back hard against increased regulation, which they argue will stymie innovation and kill jobs.
The Biden administration’s initiative could potentially put an end to the inter-agency wrangling, and would help clarify the responsibilities of various departments and task them with examining relevant topics to report back their findings.
 
If undertaken, the Biden administration’s push towards a more coordinated approach to regulating cryptocurrencies would be far more welcome than the piecemeal and seemingly arbitrary approach that has been taken so far.
 
Whether it’s done ultimately by executive order or through legislative enactment, the goal of the White House would be to adopt a unified approach towards cryptocurrencies. 
 
 

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Oct 09, 2021

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