Novum Alpha - Daily Analysis 15 October 2021 (10-Minute Read)
A fabulous Friday to you as markets rebound sharply on a raft of positive corporate earnings emanating from America.
In brief (TL:DR)
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In today's issue...
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Market OverviewSolid company earnings in the reporting season so far helped to temper fears that inflation stoked by surging energy prices and supply-chain snarls will hurt growth.
Corporate profits have been a boon for the equity market throughout the pandemic. At the same time, the wider debate about whether a stagflation-like backdrop looms remains unresolved.
China is easing restrictions on home loans amid growing concern about contagion from the debt crisis at China Evergrande Group and helping investors breathe more easily.
In Asia, markets were higher Friday with Tokyo's Nikkei 225 (+1.29%), Hong Kong's Hang Seng (+0.74%), Sydney’s ASX 200 (+0.46%) and Seoul's Kospi Index (+0.86%) all up in the morning trading session.
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1. Quants Are Going Fully Bearish on Global Money Markets
In a year where despite the volatility in everything from currencies to equities, the general direction has nonetheless been upwards, Wall Street’s legion of quants have suddenly agreed that global money markets will go bearish.
With U.S. headline inflation over 5% for the fifth consecutive month, according to data from the U.S. Bureau of Labor Statistics, which provides consumer price index data, there is mounting pressure on not just the U.S. Federal Reserve, but central banks globally, to reign in prices.
The Monetary Authority of Singapore, Singapore’s central bank and regulator has already moved to a more hawkish monetary policy yesterday, joining a growing list of central banks that have either raised rates or are looking to do so.
Turkey, Russia, Brazil, the United Kingdom, Indonesia, Canada, Norway, South Africa, Poland, New Zealand and South Korea are just some of the countries which have hiked interest rates to combat inflation.
And with yields edging up (yields move inversely to bond prices) and price pressures breaking out, the US$340 billion complex of Commodity Trading Advisors is now full bearish on everything from dollar to pound rates, according to Nomura Holdings estimates.
Systematic investors are building outsized short positions across the entire yield curve, according to Dynamic Beta Investments, with exposures particularly intense in the benchmark U.S. 10-year Treasury notes.
The quants stand to make a windfall if they get their bets on inflation right, going short on bonds, with commodities set to see their best year since 1979 and the greenback rising against all but three major currencies over the past month.
With the prospect of the Fed tapering asset purchases as soon as next month, quants are also lining up their short positions in bonds everywhere from Europe to Japan, the U.K. and Australia as central banks are all starting to wind down their fiscal intervention.
CTAs create a sophisticated network of trades that dissect price patterns to trade a range of cross-asset futures, but with positions now fully bearish, the outlook has become less clear.
As trades get crowded, the early bird catches the worm and there are signs that some bonds at least may be oversold, like British gilts and German bunds, which may prompt some traders to take money off the table.
And there are also risks that the Fed may be right, that inflationary pressures are transitory, due largely to supply chain disruptions and energy bottlenecks that will resolve given time, in which case CTAs could get stuck in a short squeeze akin to the kind witnessed by short sellers earlier this year.
CTAs will however benefit from the fact that given the sophistication and interconnectedness of their trades, retail investors will have a far harder time putting them in a short squeeze given the lack of clear targets and far larger ticket sizes that require access to institutional infrastructure.
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2. Not Keen on Cryptocurrencies? Your Stock Portfolio May Say Otherwise
Keen on stocks but not keen on cryptocurrencies? Your equity portfolio may have more exposure to the nascent digital asset class than you would immediately recognize.
According to a recent analysis by MSCI (+2.57%), no less than 52 companies representing some US$7.1 trillion in market capitalization have at least some exposure to cryptocurrencies.
The scale of companies with exposure to digital assets runs from the all-in players like Coinbase Global (+5.36%) and Riot Blockchain (+1.87%), whose entire business models rely on the development and demand for cryptocurrencies for survival, to those firms with bitcoin on their balance sheets, like Tesla (+0.89%) and Microstrategy (-0.32%) .
At the other end are the “crypto curious,” those companies that are dipping their toes into offering the market cryptocurrency services like Visa (+1.24%), Mastercard (+0.64%), Goldman Sachs (+1.23%), Morgan Stanley (+2.52%) and JPMorgan Chase (+1.57%).
Even as Tether, issuer of the widely used cryptocurrency dollar-based stablecoin USDT poses a threat to the stability of money market funds, with an estimated US$30 billion of assets in commercial paper and certificates of deposit, systemic entanglement between the realm of traditional and crypto-finance are increasing, as are risks.
The growing importance of the volatile digital asset class brings with it an assortment of challenges for investors, companies and regulators, as they try to grapple with the environmental, social and financial stability risks that come alone with the burgeoning sector.
According to MSCI, questions about everything from greenhouse gas emissions from cryptocurrency mining, to a lack of accounting standards and questions about transparency surrounding how networks are run, mean that even investors who are completely skeptical about the digital asset class, may need to at least start educating themselves on the implications and risks the nascent cryptocurrency sector poses.
Complicating matters, corporate boards and chief executive which have dismissed cryptocurrencies for years are now having to contend with an utter lack of expertise on dealing with and understanding the digital asset class.
Of the 6,500 board members searched by MSCI for its analysis, only 79 people in 64 companies included references to cryptocurrency or blockchain.
Given how companies and investment portfolios may be exposed to cryptocurrencies without even knowing it, the MSCI report concluded,
“People with advanced cryptocurrency-specific skills and experience are likely to be rare — at least within traditional board recruitment pipelines. This may present an opportunity to expand areas of board diversity such as director age.”
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3. Bitcoin Reaches Crescendo Ahead of Key U.S. ETF Deadline
Almost nine years since the Winklevoss twins first applied for a U.S. bitcoin ETF, optimism is soaring that the U.S. Securities and Exchange Commission will approve one in the coming week.
Optimism is high in the US$6.7 trillion exchange-traded fund industry that a U.S. bitcoin fund could begin trading as early as next week, and bitcoin soared after the SEC’s Office of Investor Education and Advocacy tweeted a June advisory about investing in funds that hold bitcoin futures.
In all likelihood however, the U.S. bitcoin ETF won’t be the one that the Winklevoss twins had envisaged, and the ETF wouldn’t be buying the underlying digital asset itself, instead it would attempt to abstract the custody issues of bitcoin by allowing the ETF to invest in bitcoin futures (likely CME Group products) instead.
Over this past week alone, more groups have thrown their hat in the bitcoin ETF ring, with cryptocurrency lender BlockFi and Cathie Wood’s Ark Investment Management penning down their names on applications for futures-backed bitcoin ETFs, a structure that SEC Chairman Gary Gensler has hinted he would be open to.
But a bitcoin futures ETF could go either way for the cryptocurrency market because just like the CME Group’s (+1.37%) bitcoin futures saw bitcoin rally to the then-all-time-high of around US$20,000, on expectations of broader institutional adoption, it crashed the following year.
This time could truly be different though.
In 2017, expectations that more institutions would adopt cryptocurrencies failed to materialize and the retail investor-led rally in ill-conceived initial coin offerings or ICOs, eventually fizzled out and saw a precipitous crash in prices.
Fast forward to 2021 and the landscape is dramatically different.
Large, listed companies have bitcoin on their books and more institutional investors are looking at, or have already committed to the asset class than at any point in bitcoin’s history.
Proshares has a bitcoin ETF application that is due to either be rejected or approved next Monday and while the SEC has either rejected previous applications or deferred them, Gensler’s own words suggests that this time may be different.
Gensler has signaled that he’d be in favor of funds based on CME-traded bitcoin futures, a stance that he reiterated last month.
But a bitcoin futures ETF isn’t necessarily what the industry needs.
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Oct 15, 2021