Novum Alpha - Daily Analysis 13 October 2021 (10-Minute Read)
Markets are awaiting a U.S. CPI report that is expected to show elevated inflation. Traders continue to monitor the debt woes of China Evergrande Group.
|
A wonderful Wednesday to you.
In brief (TL:DR)
|
In today's issue...
|
Market OverviewMarkets are awaiting a U.S. CPI report that is expected to show elevated inflation. Traders continue to monitor the debt woes of China Evergrande Group.
The upcoming flurry of corporate earnings releases will provide a window on whether businesses expect price pressures to crimp profit margins. A backdrop of slowing economic growth and elevated inflation, just as key central banks prepare to pare stimulus, is causing investor jitters.
The International Monetary Fund warned of the risk of sudden and steep declines in global equity prices and home values as global central banks withdraw the support they’ve provided during the pandemic.
In Asia, markets were in a mixed bag Wednesday with Tokyo's Nikkei 225 (-0.23%) and Sydney’s ASX 200 (-0.08%) down while Seoul's Kospi Index (+1.00%) was up. In Hong Kong, trading was canceled because of a storm.
|
Did you miss us at Venture & Capital Conference 2021?
|
|
|
 |
1. IMF Warns Central Bankers to Pay Attention to Inflation
One of the biggest problems facing central bankers today is the firehose of disparate data that makes it particularly challenging to come up with a comprehensive plan for monetary policy.
Depending on what a central banker is observing, the economy is either roaring ahead and in danger of overheating or starting to slow down and in need of looser monetary policy – and that’s from the same set of figures!
Like Schrodinger’s Cat (the famous theoretical physics thought experiment where a cat is both dead and alive until it is observed) central bankers are simultaneously having to deal with soaring commodity prices and supply chain snarls as well as slowing business spending and employment growth.
Which is why the International Monetary Fund (IMF) is advising central bankers to focus on one thing first – inflation – and asking central banks to be “very, very vigilant” and take early action to tighten monetary policy should price pressures prove persistent.
But somewhat contradictorily, in its bi-annual World Economic Outlook, the IMF also warned of slipping momentum on global growth despite a strong recovery so far this year.
So, which is it? Inflation or stagflation?
The IMF’s central forecast is for inflation to rise sharply towards the end of this year, primarily from supply chain constraints and pent-up demand, moderate in mid-2022, and then decline to pre-pandemic levels.
Yet the IMF is also warning central banks to act decisively on price pressures as “inflation risks are skewed to the upside.”
Central banks globally are understandably taking different paths.
In Europe and Japan, where sovereign debt yields have been negative for years, central bankers are sticking with loose monetary policy, eager to get growth on the up and up.
Central banks in Russia, Brazil, Turkey, Indonesia, Canada, South Africa, the United Kingdom, Poland, South Korea and Norway, however, have all either raised rates or are set to do so shortly.
The world’s most significant central bank, the U.S. Federal Reserve has decided to stay the course, for now, and indicated that while it may taper its US$120-billion-a-month asset purchases as soon as next month, it’s not likely to hike rates anytime soon.
Part of the reason for the Fed to keep rates low has also been slowing growth in employment, a key pillar and promise of the Biden administration, to ensure more inclusive employment growth among all communities, particularly minorities and marginalized segments of American society.
Headline inflation in the U.S. however has stayed stubbornly high, at 5% for four consecutive months, but whether the Fed will switch lanes depends more on politics (two seats at the rate-setting committee and the chairman’s position are up for grabs) than on macroeconomics.
|
Join us at Crypto World 2021 - The Worlds Largest Online Crypto Conference
|
|
|
 |
2. Not So Much as Even an Email from Evergrande Group
Don’t you hate it when someone who owes you money doesn’t even think to acknowledge the debt?
Yet China’s second largest real estate developer, the heavily-indebted Evergrande Group is doing precisely that, offering dollar-denominated bond holders nothing more than stony silence as it has now lapsed on US$148 million in interest payments.
Three offshore dollar-denominated bonds due yesterday have so far not been paid and the junk-rated debt of Evergrande is now trading at pennies on a dollar, on heightened concerns that not just of a default by the real estate developer, but others as well.
But it’s not just Evergrande that is coming under pressure.
Other smaller Chinese developers are suffering under property curbs by Beijing which has seen slowing sales and pressure to reduce debt in the highly leveraged sector.
Making matters worse, investors are reluctant to buy any more Chinese bonds, regardless of how high yields are, which would otherwise allow them to pay off earlier tranches of debt (somewhat like a Ponzi scheme but with a lot more bells and whistles).
But can Beijing really afford to let its property sector, which constitutes as much as a quarter of China’s economy and a third of GDP collapse?
There’s reason to believe that at some point, cooler heads will prevail in the politburo.
While it’s one thing to play a game of chicken with other sectors of China’s at time unbridled capitalist-ish economy, like the tech sector and after school education, it’s quite another to shoot one’s self in the proverbial foot just to prove a point.
In all likelihood, Beijing will need to force Evergrande to restructure its debt and hopefully bring calm to the increasingly volatile high yield bond markets of Asia.
Fortunately, the bulk of Evergrande Group’s liabilities are onshore, with its US$305 billion estimated debt burden owed to a string of local banks, investment companies, contractors, suppliers, private investors and home buyers.
Because Evergrande Group’s debts cut across a broad spectrum of Chinese society, the likelihood of a messy default decreases, although the same can’t be said for its offshore bonds, where default remains a risk and recourse becomes questionable.
|
 |
3. Bitcoin has the All-Time-High in Sights
A sharp rally in bitcoin saw a pause on Tuesday as the benchmark cryptocurrency hovered around the US$57,000 level while traders consolidated positions to prepare for the next push higher.
Up 90% from its low in July, Bitcoin is now within sights of its all-time high of US$64,000 or so that was achieved in April of this year.
As in past rallies, the reasons provided for bitcoin’s latest run-up are as decentralized as the blockchain itself, with analysts pointing to easing concerns about regulatory efforts in both the U.S. and China and signs of the hashrate (computing power used to mine bitcoin) rebounding.
Comments from both heads of the U.S. Securities and Exchange Commission and U.S. Federal Reserve that they had no intention to outlaw cryptocurrencies also helped to offset the bearish sentiment driven by China’s central bank purge of all cryptocurrency transactions.
Chartists (traders who study technical chart patterns to divine the future price of a security or commodity) suggest that bitcoin’s recent climb has activated an inverted head and shoulders pattern, with US$79,000 the next price target.
Short-term momentum for both bitcoin and ether has also crossed the longer-term trend, signally a potential for an even stronger rally than has been the case so far, while options positions suggest bets on a sustained advance for bitcoin.
According to data from cryptocurrency options exchange Deribit, open positions for the US$80,000 strike call (option to buy) for December 2021 expiry far outnumber those for the US$40,000 strike put (option to sell).
Macro traders (those who look at more fundamental reasons for price movements) however suggest that fresh catalysts will be needed to make bitcoin push beyond US$60,000 and if that provides momentum, can easily propel the cryptocurrency even higher.
Bitcoin’s relative strength index, a commonly used tool by traders to determine if bitcoin has been overbought or oversold, is pushing 70, suggesting that it is flirting with being overbought, but some traders prefer to use 80 as a gauge, especially given how much bitcoin is driven by narrative.
|
 |
What can Digital Assets do for you?Novum Alpha is proud to announce the launch of our flagship Novum Alpha Global Opportunity Digital Asset Fund ("the Fund"), a capital growth fund that offers a regulated and familiar investment vehicle for accredited and institutional investors to participate in the digital asset universe.
With almost a decade trading both digital assets and financial instruments, the Fund represents a blend of our best quantitative strategies melded with a discretionary overlay that provides investors with the most comprehensive and holistic approach to digital assets on the market today.
If this is something of interest to you, or if you'd like to know how digital assets can fundamentally improve your portfolio, please feel free to reach out to me by clicking here.
|
 |
|
Looking to trade cryptocurrency yourself? Then why not try CryptoHero, a member of the Novum Group.
Enjoy some of the high performing algorithms that Novum Alpha uses, absolutely free!
Because you can't be up 24 hours trading cryptocurrency markets, CryptoHero's free bots do the trading for you.
Simple and intuitive for crypto beginners to set up and run, CryptoHero is currently available on the Web, iOS and Android.
|
|
Oct 13, 2021