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Novum Alpha - Daily Analysis 11 October 2021 (10-Minute Read)

Wage gains and a surge in energy costs highlight price pressures that are adding to the case for tighter monetary policy. The U.S. Federal Reserve is expected to proceed with a tapering of bond purchases in coming weeks.

 
A magnificent Monday to you as Asian markets get off to a stronger start to the week while U.S. futures show some weakness. 
 

In brief (TL:DR)

 
  • U.S. stocks finished lower last week with the Dow Jones Industrial Average (-0.03%), the S&P 500 (-0.19%) and the tech-centric Nasdaq Composite (-0.51%) all down on concerns over inflation and job data which missed economist expectations. 
  • Asian stocks climbed Monday, helped by a rally in Japan, with traders also weighing the resilience of the pandemic recovery against an energy crunch and the prospect of tighter monetary policy to fight inflation.
  • Benchmark U.S. 10-year Treasury yields advanced four basis points to 1.61% on Friday (yields rise when bond prices fall) with no cash Treasuries trading Monday due to a U.S. holiday.
  • The dollar was steady.
  • Oil held gains with November 2021 contracts for WTI Crude Oil (Nymex) (+1.55%) at US$80.58 as gains in commodity prices continue to pick up steam.  
  • Gold rose slightly with December 2021 contracts for Gold (Comex) (+0.14%) at US$1,759.80.
  • Bitcoin (+1.89%) continued to gain into the week at US$55,483 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. Chill and Netflix
  2. Central Bankers Can’t Seem to Shake the Bogeyman of Inflation
  3. Bitcoin is on a Roll, Can it Keep on Going?
 

Market Overview

 
Wage gains and a surge in energy costs highlight price pressures that are adding to the case for tighter monetary policy. The U.S. Federal Reserve is expected to proceed with a tapering of bond purchases in coming weeks.
 
Aside from central bank tightening, investors are also bracing for upcoming reports on third-quarter company profits, which could be hit by supply chain woes, while monitoring the debt crisis and slowdown unfolding in China’s property sector.
 
Goldman Sachs (+0.56%) economists cut their forecasts for U.S. growth this year and next, blaming a delayed recovery in consumer spending with the predicted declines mostly offset by upgrades to projections for the following two years.
 
In Asia, markets climbed Monday, helped by a rally in Japan, with Tokyo's Nikkei 225 (+1.45%) and Hong Kong's Hang Seng (+2.23%) up, while Sydney’s ASX 200 (-0.41%) down and Seoul's Kospi Index was closed.
 

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1. Chill and Netflix

 
  • Netflix has been battered by a sharp slowdown in subscriber additions since the first half of 2021, which the company blamed on a lack of new content.
  • A steady stream of new content is critical to Netflix’s growth as well as its share price.
 
After pandemic restrictions ravaged production schedules and tore up the release of new content, Netflix (+0.13%), which had seen a precipitous fall in fresh content, and with it, new subscriptions, may be enjoying a resurgence.
 
In comments to the Financial Times, the video streaming service’s television chief Bela Bajaria, said that Netflix is on track to deliver a “steady pace” of programming up to the end of 2022. 
 
A steady stream of new content is critical to Netflix’s growth as well as a steady increase in its share price.
 
With user generated content from the likes of YouTube, Twitch and Facebook (+0.25%) all vying for eyeballs, Netflix has been battered by a sharp slowdown in subscriber additions since the first half of 2021, which the company blamed on a lack of new content.
 
But the streaming giant’s struggles also call into question the business model of the media industry, with some 60,000 Hollywood crew workers moving to strike in the U.S., which would bring production back to a grinding halt.
 
Crew workers, which include the likes of camera operators, sound managers, hair and makeup stylists and a plethora of other support crew that are the backbone of productions, are pushing back against a system which they say does not afford them a living wage, even as technology companies reap the benefits of the streaming boom.
 
Nonetheless, Netflix has benefited from recent successes with hits such as Squid Game and bringing in well-known favorites such as The Witcher and Seinfeld into the fold, which Wall Street has rewarded accordingly, sending the stock to a fresh all-time-high this week.
 
The South Korean dystopian title Squid Game has become an unexpected global success and augers well for Netflix’s growing investment in films and TV in South Korea, with the firm expected to spend some US$500 million this year as K-culture permeates the world.
 

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2. Central Bankers Can't Seem to Shake the Bogeyman of Inflation

 
  • Central banks in Norway, Brazil, Mexico, South Korea and New Zealand have already gone ahead to raise interest rates, as has the United Kingdom, Russia and Indonesia. 
  • But complicating matters for policymakers has been signs that global economic recovery is faltering, leading to a perfect storm – stagflation, which is marked by slow growth and high inflation.
 
Energy prices are soaring, and supply chains are backed up, yet somehow there is both a simultaneous shortage of workers and slowing growth in employment – central bankers are having to face seemingly conflicting data to determine what their next steps ought to be.
 
Even the U.S. Federal Reserve is conceding that inflation is remaining stubbornly persistent, and well beyond expectations as it contends with both raising rates and dialing back asset purchases.
 
Central banks in Norway, Brazil, Mexico, South Korea and New Zealand have already gone ahead to raise interest rates, as has the United Kingdom, Russia and Indonesia.
 
Even as the economic recovery shows signs of slowing, central bankers are being forced to reign in price increases on signs that inflation won’t fade anytime soon, amid supply chain strains, surging commodity prices, post-lockdown demand, ongoing stimulus and labor shortages.
 
Complicating matters for policymakers have been signs that the global economic recovery is faltering, leading to a perfect storm – stagflation, which is marked by slow growth and high inflation.
 
Central bankers will now need to decide which is the bigger problem, inflation, or slowing growth?
 
Targeting inflation with tighter monetary policy adds pressure on already shaky economies, but trying to boost demand by keeping rates low and snapping up assets, may ignite prices further.
 
Some central banks have already wavered when it’s come to inflation, including the Bank of England, whereas the European Central Bank and Bank of Japan have remained steadfast in stimulating their economies aggressively.
 
The International Monetary Fund has predicted that in advanced economies at least, inflation will soon ease to around 2%, the target rate for the Fed, once supply chain disruptions eventually sort themselves out.
 
With the U.S. Federal Reserve set to face a potential leadership renewal and members of the powerful rate-setting Federal Open Market Committee already seeing changes among their ranks, with two of the most hawkish having had to step down because of revelations around their trading activities, the foremost central bank could go either way, depending more on politics than macroeconomics.
 
Should the more dovish incumbent Fed chair Jerome Powell stay for another four-year term and like-minded central bankers join him at the Fed, rates are less likely to be lifted as soon as some analysts would suggest, but a potential cutback on asset purchases could still happen as soon as next month.
 
 

3. Bitcoin is on a Roll, Can it Keep on Going?

 
  • 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 
 
Against a backdrop of dysfunction in Washington over the debt ceiling last week, bitcoin quietly rose to put it on pace for its best week in months.
 
Despite a slew of potentially negative macro news, including a sharp correction in equities and bonds, bitcoin has rebuffed naysayers, soaring to around US$54,500 into the weekend, fueling the fortunes of stocks of companies from Coinbase Global (-1.37%) to Silvergate Capital (+7.20%), which operates the cryptocurrency friendly Silvergate Bank.
 
Even though China’s central bank, the People’s Bank of China, has outlawed all cryptocurrency transactions last week, pronouncements by the U.S. Federal Reserve and the U.S. Securities and Exchange Commission that they had no intention to ban cryptocurrencies saw the nascent asset class rebound strongly and rally hard.
 
A Bank of America (+0.50%) report has also called cryptocurrencies an asset class that is too big for investors to ignore, and some analysts are pointing to rising commodity prices, fueling the narrative that bitcoin could serve as a hedge against inflation.
 
In a report last week, JPMorgan Chase & Co. (+0.076%) said that there are tentative signs of a shift away from gold and into bitcoin, a trend which has started re-emerging in recent weeks, as inflation proves to be stubbornly persistent.
 
Aggregate open interest in bitcoin options and futures across major cryptocurrency exchanges has also risen by over a fifth last week, according to data from ViewBase, an analytics company.
 
Rising prices could embolden leveraged bets that cryptocurrencies have even more room to rally.
 
In comments to Bloomberg, Steve Kolano, Chief Investment Officer at BNY Mellon Investor Solutions, whose team manages around US$30 billion in assets, noted,
 
“We believe that digital currency is a trend that’s probably here to stay.”
 
Citing a wave of major central banks looking more closely at digital currencies, Kolano added,
 
“That digitization is a trend that probably continues and, in a lot of ways, changes the nature of fiat versus digital currency and the way financial transactions happen.”
 
 

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Oct 11, 2021

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