Novum Alpha - Daily Analysis 12 October 2021 (10-Minute Read)
Global markets are struggling to shake off worries that inflation spurred by an energy crunch and pandemic-related supply-chain snarls will sap company profits and economic expansion.
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A terrific Tuesday to you as markets take a turn downwards.
In brief (TL:DR)
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In today's issue...
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Market OverviewGlobal markets are struggling to shake off worries that inflation spurred by an energy crunch and pandemic-related supply-chain snarls will sap company profits and economic expansion.
Investors are also increasingly uncertain if the U.S. Federal Reserve will hold its nerve and keep rates low.
Financial firms this week will kick off the third-quarter earnings season, heralding a key test of investor confidence.
Traders are also awaiting reports on the U.S. consumer-price index and retail sales. The figures will help inform expectations about the likely timeline for Fed tapering and any eventual rate hikes.
In Asia, markets fell Tuesday on concerns about elevated inflation stoked by energy costs and the possibility of a widening Chinese crackdown on private industry with Tokyo's Nikkei 225 (-0.93%), Hong Kong's Hang Seng (-0.94%), Sydney’s ASX 200 (-0.35%) and Seoul's Kospi Index (-1.28%) all down.
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1. India Stock Market Poised to Hit the Big Leagues
Just like the game of cricket, which India learned from the British and surpassed them, the Indian stock market is poised to overtake the U.K. stock exchange on a wave of retail investment.
By one measure, record low interest rates and a retail investing boom the likes of which has never been witnessed before looks set to push the Indian stock market into the leagues of the top five equity markets in the world.
Market capitalization in India’s stock market has surged 37% this year to US$3.46 trillion according to an index compiled by Bloomberg, which is inches away from the London Stock Exchange which saw a more modest increase of about 9% to US$3.59 trillion.
London however would be much larger than Mumbai if secondary listings (dual listings of the same company’s stock) and depository receipts were included.
But India enjoys a far higher growth potential and a vibrant technology sector that’s seen a flood of startups going public this year.
Just as sentiment for Chinese equities has soured amidst a broad crackdown by Beijing on various industries, Indian stocks have soared.
And given the state of development of the Indian market, the longer-term growth potential from a developing economy that is fluent in English is attractive, especially given a stable and reformist political base that is helping to realize this potential.
The S&P BSE Sensex, the benchmark index of the Indian bourse has soared more than 130% since the pandemic hit last March, the most among major national benchmarks tracked by Bloomberg, and handed investors an annualized return of almost 15% in dollar terms over the past five years.
Goldman Sachs (-1.93%) projects Indian equities will continue to rise to US$5 trillion by 2024.
And it’s not just the tech sector which has tremendous growth potential, consumer companies and services catering to a burgeoning and aspiring middle class are also expected to do well.
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2. Benchmark U.S. Oil Prices Hit 7-Year High
Energy prices are soaring and threatening to derail the global economic recovery as the price of U.S. benchmark West Texas Intermediate hit a fresh 7-year high yesterday on fears that fuel demand was recovering faster than producers could cope with.
Since the start of September, oil prices have climbed by over 16%, spurred on by a global economic rebound and a shortage of natural gas that has increased demand for other energy sources.
The Biden administration has hinted at tapping U.S. strategic stockpiles to help ease surging energy prices, but Americans are still paying more for fuel at the pump than at any time prior to 2014, a political liability for an increasingly unpopular White House.
Part of the problem has also been a decline in fracking, a controversial drilling process that extracts oil by fracturing bedrock formations using a highly pressurized liquid.
Hydraulic fracking is said to increase methane emissions and contribute to climate change, contaminate groundwater as well as ruin natural lands, while increasing the risk of earthquakes.
A precipitous fall in oil prices because of the pandemic made it economically unfeasible for fracking, which is more costly than traditional extraction methods, but even as the price of oil has recovered, stricter environmental regulations policed by the Biden administration is preventing fracking companies from tapping into the vast shale oil reserves in the United States.
Soaring energy prices have heightened concerns that recent high inflation rates are unlikely to be transitory, increasing the likelihood of interest rate hikes and pushing yields higher (yields rise when bond prices fall).
A Reuters poll revealed that economists expect U.S. consumer prices, due to be published on Wednesday, to show prices rose by 5.3% in September, marking the fourth consecutive month that headline inflation in the world’s largest economy has been over 5%.
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3. All of the Flavor of Bitcoin, None of the Digital Asset
The main issue with “diet” soda is that it’s not entirely satisfactory – you don’t quite get the full flavor of the beverage, and you don’t feel satiated, making you eat more of other stuff.
Yet the U.S. Securities and Exchange Commission seems intent on doling out diet bitcoin for investors, with two equity ETFs trading in the U.S. and a third being approved by the agency, even as investors are calling for a full flavor bitcoin ETF.
The SEC has so far declined to approve any ETFs that invest in bitcoin itself, even though a slew of asset managers have applied to do so and similar vehicles are already commonplace in Sweden, Switzerland, Germany and Canada.
Speculation is rife on whether the SEC may approve a full-flavored bitcoin ETF, with encouraging comments by SEC Chairman Gary Gensler in August, fueling hopes that it will happen eventually.
Demand for a dedicated bitcoin ETF is high, with Grayscale Bitcoin Trust having grown to US$35 billion since its launch in 2013, and net flows into dedicated cryptocurrency funds hitting a four-year high of over US$2.5 billion last week, according to data from EPFR.
And while a Canadian bitcoin ETF has been around for a while now, a U.S. bitcoin ETF remains elusive.
Instead, the SEC has approved ETFs which invest in companies that are “materially” engaged in cryptocurrency-related activities, including mining, trading and infrastructure, as well as over-the-counter private investment trusts linked to cryptocurrency.
From the perspective of the SEC, these crypto-equity ETFs are far less risky than a fund that invests directly in bitcoin.
Last week, testifying before the House Financial Services Committee, Gensler described cryptocurrency finance as the “Wild West” adding,
“This asset class is rife with fraud, scams and abuse in certain applications. We can do better.”
If so, wouldn’t a regulated bitcoin ETF be a good place for the SEC to start?
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Oct 12, 2021