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Novum Alpha - Daily Analysis 14 October 2021 (10-Minute Read)

Investors continue to evaluate the resilience of the economic rebound from the pandemic to supply chain disruptions, a jump in energy prices and the prospect of reduced central bank support.

 
A terrific Thursday to you as markets rebound to recovery hopes.
 

In brief (TL:DR)

 
  • U.S. stocks closed higher Wednesday with the Dow Jones Industrial Average flat (+0.00%), while the S&P 500 (+0.30%) and the tech-centric Nasdaq Composite (+0.73%) were up.
  • Asian stocks mostly rose Thursday as long-dated U.S. Treasury yields remained lower and traders weighed the prospect of tighter monetary policy to tackle economic risks from inflationary pressures.
  • Benchmark U.S. 10-year Treasury yields rose about one basis point to 1.55% (yields rise when bond prices fall).
  • The dollar was little changed.
  • Oil stabilized above $80 a barrel with November 2021 contracts for WTI Crude Oil (Nymex) (+0.30%) at US$80.68 with few signs of the energy crunch easing for now. 
  • Gold dipped from the highest in nearly a month with December 2021 contracts for Gold (Comex) (-0.28%) at US$1,789.70 despite inflation concerns. 
  • Bitcoin (+3.32%) rose to US$58,170 with outflows leading inflows on speculation of a prospective U.S. Bitcoin ETF (outflows typically signal that investors are looking to hold Bitcoin in anticipation of higher prices). 
 

In today's issue...

 
  1. U.S. Inflation is Heating Up
  2. Xi Jinping is Playing Chicken with the Chinese Economy
  3. Do we even need a U.S. Bitcoin ETF?
 

Market Overview

 
Investors continue to evaluate the resilience of the economic rebound from the pandemic to supply chain disruptions, a jump in energy prices and the prospect of reduced central bank support.
 
Former Treasury Secretary Lawrence Summers castigated U.S. monetary policy makers for paying too much attention to social issues and not enough to the biggest risk to inflation since the 1970s.
 
The Biden administration is trying to relieve supply-chain bottlenecks ahead of the Christmas shopping season, but officials acknowledge their options are limited.
 
In Asia, markets were higher Thursday with Tokyo's Nikkei 225 (+1.01%),Sydney’s ASX 200 (+1.10%) and Seoul's Kospi Index (+1.17%) all up while Hong Kong markets are shut Thursday for a holiday.
 

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1. U.S. Inflation is Heating Up

 
  • Price pressures are heating up with U.S. consumer price growth in September hitting a 13-year high as inflation drove up the cost of food, energy and rent.
  • Central bankers are having to contend with a confluence of inflationary pressures, from supply chain disruptions, to soaring energy and food prices.
 
Even as temperatures come down, price pressures are heating up with U.S. consumer price growth in September hitting a 13-year high as inflation drove up the cost of food, energy and rent.
 
The Consumer Price Index (CPI) published yesterday by the U.S. Bureau of Labor Statistics saw a 5.4% increase in September from a year ago, slightly higher than August and the fifth consecutive month that headline inflation has been over 5%.
 
Even when volatile food and energy prices were stripped out, the so-called “core” CPI still registered a 0.2% increase from August, compared with a month-on-month increase of 0.1% and maintains an annual pace of 4%.
 
Stubbornly persistent price increases are challenging the U.S. Federal Reserve’s resolve to hold interest rates down, and the central bank has already made it clear that it will start to taper its US$120-billion-a-month asset purchases soon, with some analysts predicting it could take place as quickly as November when the Fed next meets.
 
Central bankers are having to contend with a confluence of inflationary pressures, from supply chain disruptions, to soaring energy and food prices.
 
Most of these price pressures are likely to be fleeting, but have put an immediate dent in consumer purchasing power and may pose a drag on the economic recovery, especially given that a full 70% of the U.S. economy is consumption-based.
 
Of primary concern for the Fed will be signs that upward price pressures are starting to broaden out, affecting everything from furniture and appliances to user cars and trucks.
 
Nonetheless, it looks like the Fed will stay the course, so long as Chairman Jerome Powell is at the helm.
 
Two of his more hawkish colleagues on the powerful Fed rate-setting committee have stepped down early and Powell has stuck to the script that price pressures will eventually normalize and the Fed shouldn’t be responding in a knee-jerk fashion.
 

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2. Xi Jinping is Playing Chicken with the Chinese Economy

 
  • With China’s President Xi Jinping sailing into an economic storm of his own conjuring, the leader of the world’s second largest economy has remained resolute to press ahead with difficult structural reforms.
  • The greatest danger is a gross miscalculation by Xi and his comrades in a game of chicken that calls for the utmost finesse and precision.
 
The crucial challenge of playing a game of chicken is to bug out at just the right moment because if you go over the cliff, you may have won the game, but you’ve missed the point.
 
With China’s President Xi Jinping sailing into an economic storm of his own conjuring, as one of the country’s largest developers teeters on the brink of bankruptcy while manufacturers grapple with power shortages across the Middle Kingdom, the leader of the world’s second largest economy has remained resolute to press ahead with difficult structural reforms.
 
If Xi manages to pull it off, he would have won another game of chicken in a long series of political gambles, from the elimination of term limits on the presidency, to his relentless pursuit of “common prosperity.”
 
As Xi seeks to cement his iron grip on power ahead of an unprecedented third term as President during China’s Communist Party’s 20th Congress late next year, all eyes will be on how far he will go to become a living legend and whether the Chinese economy can survive his political ambition.
 
All eyes will be on Beijing next week as the National Bureau of Statistics will release its third quarter growth results as well as other key economic indicators and provide an insight into the impact of the Evergrande Group’s debt crisis.
 
Chinese property sales appear to be on track to his 1.8 billion square meters this year, which compares favorably with an annual average of 1.7 billion square meters from 2017 to 2019.
 
Surging sales and soaring property prices which threatened to derail Xi’s “common prosperity” agenda may have emboldened apparatchiks to crackdown on the white-hot real estate market and allow Evergrande Group to flounder by missing payments.
 
But the risk that Evergrande Group’s issues could spill over to the wider property market which makes up a full quarter of China’s economy and a third of GDP means that there’s a limit to how far Beijing can go.
 
“Common prosperity” could very rapidly unravel to become “common poverty.”
 
Much of Chinese household wealth is tied up in the real estate market, including high-yielding investment management products issued by Evergrande Group, and Xi will win himself few fans by tanking the entire system.
 
That Beijing knows when to bug out has been made plain through the restructuring of other heavily indebted Chinese conglomerates that went on debt-fueled binges, like HNA Group and China Huarong Asset Management, both of which required “official” support through back channels and avoided messy liquidations.
 
The crisis at Evergrande Group is already affecting the ability of other Chinese developers to raise capital offshore in the dollar-denominated bond markets even as yields on their debt have soared.
 
Evergrande Group has already started to hive off assets in a desperate bid to raise cash to shore up its finances, but given its staggering US$305 billion in liabilities, can only go so far.
 
If forced to sell down its vast land bank of some 565 million square meters, the fire sale could cause a precipitous plunge in land prices in many areas of the country.
 
Evergrande Group has ongoing development projects in no less than 22 cities in China and the fallout would be substantial, after which the only viable option would be for Beijing to nationalize the company.
 
The greatest danger is a gross miscalculation by Xi and his comrades in a game of chicken that calls for the utmost finesse and precision.
 
You can keep your eyes open for only so long as you head towards the cliff, because at some stage, everyone has to blink and investors can only hope Xi blinks before the edge is past. 
 
 

3. Do we even need a U.S. Bitcoin ETF?

 
  • Speculation has been building that the SEC could approve a futures-backed bitcoin ETF product as soon as this week, on a wave of cryptocurrency-themed ETF approvals.
  • But it’s not immediately clear what good a bitcoin ETF will do at this stage of the cryptocurrency industry’s development.
 
Because bitcoin is driven so much by narrative, it’s entirely possible that bulls hoping for a bitcoin ETF may find themselves caught in a sell-the-news event if the U.S. Securities and Exchange Commission approves one.
 
Speculation has been building that the SEC could approve a futures-backed bitcoin ETF product as soon as this week, on a wave of cryptocurrency-themed ETF approvals.
 
This past week, several ETFs investing in cryptocurrency companies have all gained approval from the SEC and with a deadline for a decision fast approaching, sentiment is bullish that the SEC may finally approve a bitcoin ETF, albeit not one that buys the underlying cryptocurrency, instead relying on futures instead.
 
But it’s not immediately clear what good a bitcoin ETF will do at this stage of the cryptocurrency industry’s development.
 
As it is, retail-facing platforms like Robinhood Markets (-0.025%) and eToro have provided access to cryptocurrencies like bitcoin to ordinary investors.
 
And institutional investors have since 2013, had access to bitcoin through vehicles such as the Grayscale Bitcoin Trust, warts and all.
 
Awareness and familiarity with the asset class has also grown, and family offices and other institutional investors have worked with specialist custodians and over-the-counter providers to either buy bitcoin to store and hold, or trade it.
 
Bitcoin is already entering overbought territory on its 14-day relative strength index (RSI), a common tool used by traders to determine if an asset has been overbought.
 
Some technical traders however say that an RSI of 70 is too low for cryptocurrencies like bitcoin, especially given how volatile they are, preferring instead to use a higher threshold of 80 instead to mark “irrational exuberance.”
 
The past year has also seen many rallies followed by sharp corrections on typical buy the rumor, sell the news type trades, from El Salvador’s botched roll out of bitcoin as legal tender, to Coinbase Global’s (-1.02%) lackluster direct listing on Nasdaq.
 
It’s also entirely possible that a U.S. bitcoin ETF, while positive, will do very little to advance the industry as a while.
 
To be sure, U.S. investors who want to gain exposure to bitcoin have a variety of options.
 
And while an ETF would make it easier, as more U.S.-based trading platforms could conceivably offer access to the cryptocurrency, as opposed to the handful that currently do, it would hardly be a game changer.
 
The SEC appears to be leaning towards a futures-backed bitcoin ETF, which is not ideal given that the ETF has to roll forward the futures contracts, which results in slippage that tends to eat into performance.
 
Investors may be better off just buying the real thing.
 
 

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Oct 14, 2021

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