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Novum Alpha - Daily Analysis 28 October 2021 (10-Minute Read)

Global stocks remain close to all-time peaks, supported by robust corporate earnings so far and despite concerns over threats to the economic recovery and the otherwise relentless rally in stocks.

 
A terrific Thursday to you as markets tread water amidst multiple challenges from various directions. 
 

In brief (TL:DR)

 
  • U.S. stocks closed lower Wednesday with the Dow Jones Industrial Average (-0.74%) and the S&P 500 (-0.51%) down, while the tech-centric Nasdaq Composite (+0.00%) was flat.
  • Asian stocks fell Thursday amid concerns that the recovery from the pandemic will slow as elevated inflation forces tighter monetary policy.
  • Benchmark U.S. 10-year Treasury yields slipped to 1.55% (yields fall when bond prices rise) on heightened expectation of Fed tapering as soon as November.  
  • The dollar ticked up.
  • Oil fell with December 2021 contracts for WTI Crude Oil (Nymex) (-2.20%) at US$80.84.
  • Gold edged higher with December 2021 contracts for Gold (Comex) (+0.29%) at US$1,804.00 stoked by inflation fears. 
  • Bitcoin (-2.70%) fell to US$58,916 on continued profit taking, with the benchmark cryptocurrency struggling to break past US$59,000 even as inflows to exchanges slow (inflows suggest that investors are looking to sell bitcoin in anticipation of lower prices). 
 

In today's issue...

 
  1. The Central Bank Crisis of Confidence
  2. Could Evergrande’s Founder Save the Company?
  3. Bitcoin’s Buy on Rumor Sell on News Trade is Back
 

Market Overview

 
Global stocks remain close to all-time peaks, supported by robust corporate earnings so far and despite concerns over threats to the economic recovery and the otherwise relentless rally in stocks. 
 
The risk is sentiment could weaken if investors lose confidence in the ability of policy makers to contain inflation while nurturing the economic rebound and that the fallout from policy missteps will be higher. 
 
Investors are awaiting the European Central Bank policy meeting as well as a report later Thursday on U.S. economic growth, which is likely to show a cooling recovery.
 
How central bankers will respond could make all the difference in markets. 
 
In Asia, markets slipped Thursday amid concerns that the recovery from the pandemic will slow as elevated inflation forces tighter monetary policy with Tokyo's Nikkei 225 (-0.91%), Hong Kong's Hang Seng (-0.22%) and Sydney’s ASX 200 (-0.33%) all down, while Seoul's Kospi Index (+0.22%) was up in the morning trading session. 
 
 

1. The Central Bank Crisis of Confidence

 
  • Before they could lean back in their leatherbound chairs, central bankers had to deal with a crisis of their own making, the demons of inflation are threatening to derail their earlier conviction, that more, indeed is better.
  • All this is happening at a time when the easy part of the recovery is behind us. The world isn’t back to normal just yet and growth across all major economies is showing signs of slowing down.
 
Not so long ago, in a global economy not so far away, central bankers sat at the very summit of the financial universe, beacons of wisdom in a chaotic Covid-19 riddled landscape who had figured monetary policy to save us all.
 
Flood the system with cash, let it be so.
 
And on the seventh day, the central bankers rested.
 
Yet before they could lean back in their leatherbound chairs, central bankers had to deal with a crisis of their own making, the demons of inflation are threatening to derail their earlier conviction, that more, indeed is better.
 
More money, more lending, more spending.
 
But since a sharp spike in commodity prices and supply chain snarls appear to be more than transitory, weaker hands are wavering.
 
There is a sense on the street that the Bank of England is likely to lift borrowing costs as soon as December, a notion once considered fantasy, while the European Central Bank, which has maintained a steely resolve to keep rates low, is having trouble convincing investors it will hold true to its promise.
 
More importantly, U.S. Federal Reserve Chairman Jerome Powell, who once described price pressures as “transitory” is now having to deal with five consecutive months of headline inflation over 5%.
 
Powell, who was all but guaranteed a second term as the head of the world’s most significant central bank is now facing his own leadership crisis, and possibly an unceremonious early retirement.
 
Plagued by scandals of inappropriate trading by other federal bankers under his watch and recent attacks on his bank regulation record, it’s no guarantee that Powell will see through another term as head of the Fed.
 
And that could be a serious problem.
 
If nothing else, Powell has come to represent the consistency and even-handedness that investors have relied on to fuel stocks to all-time-highs.
 
Unlike former Fed Chair Ben Bernanke, Powell has ensured his communication with the market has for the most part been unambiguous and predictable, using charts and clear language to intimate the Fed’s position.
 
Powell’s successor, if it comes to that, may not have the same sensibilities.
 
Yet a knee-jerk decision to raise rates, whoever helms the Fed risks shredding the credibility of the Fed and with it, the confidence of the markets.
 
Most central banks prior to the pandemic made it clear that inflation was too low, with the Fed and the ECB adjusting their policies to transition to be more tolerant to price increases, albeit temporarily.
 
To effectively renounce these once-in-a-decade policy shifts so soon wouldn’t make inflation disappear overnight, but would undermine the conviction that central banks will stick to their guns.
 
All this is happening at a time when the easy part of the recovery is behind us. The world isn’t back to normal just yet and growth across all major economies is showing signs of slowing down.
 
Raising rates in response to inflation is like slamming the brakes just as the car is pulling out of the driveway.
 
But there remains a beacon of hope. Among all the major central banks, the Fed has remained one of the most dovish, advocating that high inflation is transitory and sticking to the script on achieving maximum employment.
 
At least those were Powell’s words. A new Fed chair may not share such views.
 

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2. Could Evergrande's Founder Save the Company?

 
  • Even as Evergrande Group struggles to pay off its staggering US$305 billion in obligations to trade creditors, lenders and investors, Beijing is urging its tycoon founder to shore up the company with some of his own personal wealth.
  • But how much does Hui even have? And surely it would be a drop in the ocean compared to how much Evergrande owns?
 
Champagne, cigars and private jets. Bottles of some of the most expensive fiery sorghum-based spirit baijiu washed down exquisite dinners of beluga caviar.
 
China Evergrande Group founder Hui Ka Yan’s excesses barely stood out amidst China’s Gilded Age, where billionaires were being minted at a pace faster than anywhere else in the world.
 
But now that the embattled China Evergrande Group is teetering on the edge of default, Beijing is pushing for the Hui to stump up the cash to clean up mess that he helped manufacture.
 
Even as Evergrande Group struggles to pay off its staggering US$305 billion in obligations to trade creditors, lenders and investors, Beijing is urging its tycoon founder to shore up the company with some of his own personal wealth.
 
But how much does Hui even have? And surely it would be a drop in the ocean compared to how much Evergrande owns?
 
The Bloomberg Billionaires Index estimates Hui’s fortune at no more than US$7.6 billion, which would barely cause a dent in the liabilities of China Evergrande Group.
 
And with most of his net worth tied to shares in Evergrande Group, it’s hard to see how much of that wealth Hui could realize on short notice.
 
To be sure, Hui has received over US$7 billion in dividends from China Evergrande Group since the company was listed in 2009, but those mansions and Gulfstreams aren’t cheap and it’s anyone’s guess how much still remains.
 
Nonetheless, if Hui moves to shore up his company with his own wealth, which is not without precedent, it may motivate Beijing to do more to prevent the China Evergrande Group from collapsing and thereby causing far more widespread damage to the Chinese economy.
 
Last week, Evergrande paid out a US$83.5 million coupon to dollar-denominated bondholders, before the expiration of a grace period after which the company would have been in default, but is struggling to raise more capital by way of asset sales.
 
Hui’s wealth may already be shielded using a string of offshore shell companies, a tactic which is popular among the global rich to legally protect assets from creditors and he was mentioned specifically in the Panama Papers in 2016.
 
One possibility remains the nationalization of China Evergrande Group altogether, a not entirely impossible prospect given Chinese President Xi Jinping’s push for “common prosperity” and greater scrutiny on billionaire excess in the Middle Kingdom.
 
Hui is also no stranger to the Chinese Communist Party, ensuring that his busines priorities aligned closely with the powers that be and is a member of the Political Consultative Committee, which helps advise the government on policy, throwing his lot with his political masters may be the best hope for China Evergrande Group, and perhaps China’s bloodied property sector.
 

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3. Bitcoin's Buy on Rumor Sell on News Trade is Back

 
  • As is the case with so many things in the cryptocurrency world, the US$1 billion of inflow into the ProShares Bitcoin Strategy ETF wasn’t enough to defeat the volatility inherent in the trade.
  • But one of the bigger questions traders and investors would no doubt be asking is whether the correction is durable and in fact marks the beginning of a fresh crypto winter.
 
In the run-up to a prospective U.S. bitcoin ETF, bullish sentiment was sufficient to hurl the benchmark cryptocurrency to a fresh all-time-high of around US$67,000.
 
But as is the case with so many things in the cryptocurrency world, the US$1 billion of inflow into the ProShares Bitcoin Strategy ETF wasn’t enough to defeat the volatility inherent in the trade.
 
Just as in 2017, when CME Group and the CBoE launched their own cash-settled bitcoin futures product, providing traders with an opportunity to short bitcoin in a meaningful way for the first time, traders took profit faster than you could say the word “moon.”
 
As bitcoin slipped like an old man sliding into a warm bath below US$60,000, profit taking was out in force and the cryptocurrency fell to its lowest intraday price in two weeks, taking down much of the rest of the digital asset universe with it.
 
The benchmark Bloomberg Galaxy Crypto Index (which Novum Alpha uses as its comparison benchmark) and tracks some of the largest digital assets, fell by as much as 7.5% at one point.
 
Given the relentless run-up in bitcoin’s price this past month, a little pullback was in order any way and given the volatile nature of cryptocurrencies, is table stakes.
 
The velocity of the rally from around US$30,000 in July to where bitcoin is today has always meant that a breather was in order.
 
But one of the bigger questions traders and investors would no doubt be asking is whether the correction is durable and in fact marks the beginning of a fresh crypto winter.
 
In 2017, the launch of cash-settled bitcoin futures products by the CBoE and CME Group saw a sharp correction in cryptocurrencies just three months later and ushered in a long crypto winter.
 
Is this time different?
 
In many ways yes. 2017 was far more speculative, with the push in cryptocurrency prices driven primarily by retail investors.
 
And while retail still makes up the bulk of flows today, there are far more institutional investors who have thrown their hat in the ring in a more meaningful way than could ever have been hoped for in 2017.
 
Speculators essentially bought on the rumor (of a U.S. bitcoin ETF) and sold on the news, with total long crypto position liquidations on Wednesday topping some US$700 million, according to data from Bybt.com
 
The market has been (over) leveraged long for a few weeks because of this bitcoin ETF, some profit-taking was genuinely in order.
 
 

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Oct 28, 2021

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