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Novum Alpha - Daily Analysis 29 October 2021 (10-Minute Read)

Markets are grappling with a number of crosscurrents even as generally positive corporate performance has helped to underpin global equities.

 
A fantastic Friday to you as markets find their footing in what has been a choppy week of trading. 
 

In brief (TL:DR)

 
  • U.S. stocks closed higher on Thursday with the Dow Jones Industrial Average (+0.68%), the S&P 500 (+0.98%) and tech-centric Nasdaq Composite (+1.39%) all higher thanks to strong corporate earnings. 
  • Asian stocks fell Friday as traders weighed bond-market gyrations on concerns over inflation and monetary tightening.
  • Benchmark U.S. 10-year Treasury yields fell one basis point to 1.57% (yields fall when bond prices rise).
  • The dollar ticked up from a one-month low.
  • Oil edged higher with December 2021 contracts for WTI Crude Oil (Nymex) (+0.02%) at US$82.83.
  • Gold was lower with December 2021 contracts for Gold (Comex) (-0.27%) at US$1,797.80 as it struggles to break past the key resistance at US$1,800. 
  • Bitcoin (+4.41%) rebounded sharply to US$61,491, on suggestions that the European Central Bank will continue to keep interest rates low and monetary policy dovish, with outflows taking a jump on inflows (outflows suggest that investors are looking to hold bitcoin in anticipation of higher prices). 
 

In today's issue...

 
  1. The ECB Holds Fast to Dovish Policy
  2. Not all Tech Stocks Shine
  3. First Bitcoin, Now Ethereum?
 

Market Overview

 
Markets are grappling with a number of crosscurrents even as generally positive corporate performance has helped to underpin global equities.
 
Inflation risks from supply-chain snarls and costlier raw materials are boosting expectations for rate hikes and dimming the economic outlook as margins get squeezed. 
 
Meanwhile, inflation pressures and the prospect of interest-rate hikes are whipsawing global bond markets despite the European Central Bank renewing its pledge to continue with its program of emergency bond-buying, albeit at a “moderately” slower pace.
 
In Asia, markets slipped on Friday's morning session with Tokyo's Nikkei 225 (-0.10%), Hong Kong's Hang Seng (-0.29%), Sydney’s ASX 200 (-0.82%) and Seoul's Kospi Index (-0.58%) all lower. 
 
 

1. The ECB Holds Fast to Dovish Policy

 
  • European Central Bank's President Christine Lagarde rebuffed investor expectations of an abrupt policy change that would have seen rates rise next year to quell fast rising prices.
  • But Lagarde acknowledged that inflation would “take longer to decline than originally expected” and that supply chain bottlenecks were like to last well into next year.
 
“You turn if you want to, the Lady’s not for turning.”
 
– Margaret Thatcher
 
Kudos to the European Central Bank as its President Christine Lagarde rebuffed investor expectations of an abrupt policy change that would have seen rates rise next year to quell fast rising prices.
 
Despite acknowledging inflation, the ECB did not support market expectations of a rate rise before the end of 2022.
 
Instead, after a 2-day meeting of its governing council, the ECB said it would continue with its US$2.16 trillion pandemic emergency purchase program although at “a moderately lower pace” while keeping deposit rates unchanged at -0.5%.
 
But Lagarde acknowledged that inflation would “take longer to decline than originally expected” and that supply chain bottlenecks were like to last well into next year.
 
The ECB’s steely resolve on rates is in stark contrast to other major central banks which appear to be caving.
 
The Bank of England is widely expected to lift rates as early as next month and on Wednesday, the Bank of Canada jolted markets by saying it would stop asset purchases and raise rates sooner than expected.
 
Central banks from Brazil, Turkey and Russia have all had to raise rates to reign in runaway price pressures, but the ECB appears to be more patient, which should help sustain the rally in European stocks.
 
Your move Fed. 
 

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2. Not all Tech Stocks Shine

 
  • As poor third quarter numbers saw a sharp selloff that wiped off over US$200 billion in market cap from Apple and Amazon combined.
  • The heavy selling of the tech heavyweights stood in sharp contrast to Microsoft and Google, which both rose 4% after exceeding analyst forecasts.
 
Hot on the heels of Microsoft (+0.37%) and Google’s (-0.25%) stellar third quarter numbers, expectations were high that Apple (+2.50%) and Amazon (+1.59%) would sustain a rally in tech’s biggest names.
 
Unfortunately that was not to be, as poor third quarter numbers saw a sharp selloff that wiped off over US$200 billion in market cap from Apple and Amazon combined.
 
Missed revenue expectations at Apple saw shares fall by as much as 5% in the trading session, hurt by supply chain issues while Amazon dropped by just as much after it gave a revenue forecast that was well below consensus estimates and warned that high costs could wipe out any profit for the all-important holiday quarter.
 
The heavy selling of the tech heavyweights stood in sharp contrast to Microsoft and Google, which both rose 4% after exceeding analyst forecasts.
 
Making matters worse, although the peak U.S. shopping season is just around the corner, higher shipping costs and supply chain issues has seen Amazon warn investors that it could see sales of US$140 billion for the quarter without a cent in profit.
 
Apple CEO Tim Cook conceded on a conference call that the supply constraints were worse than expected and cost the company about US$6 billion.
 
The divergent outcomes from two corners of the tech world, with Microsoft and Google on one side, and Apple and Amazon on the other, help to highlight how tech companies that have physical products are still exposed to the supply chain issues of the global economy.
 
Whereas Microsoft and Google benefited by an increase in demand for cloud computing and remote working capabilities, the hardware that supports those functions, like Macbooks from Apple and accessories fulfilled by Amazon are susceptible to supply chain snarls.
 
If nothing else, like empty seats on a plane that has taken off, the fourth quarter will be even more challenging for Amazon and Apple.
 
Even as peak holiday buying gets in gear, Apple and Amazon may see lost revenues because of inability to deliver on demand, with limits to how much they can increase prices.
 

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3. First Bitcoin, Now Ethereum?

 
  • Traders are already positioning for a surge in ether prices on bets that the U.S. Securities and Exchange Commission will give the go-ahead next year for a U.S. ETF that would track the price of ether.
  • The successful launch of the ProShares Bitcoin Strategy ETF has heightened expectations that similar futures-backed bitcoin products from over 20 other applicants will be approved in the coming weeks and months.
 
Despite being the world’s most heavily used blockchain, in terms of price, ether has always been the bridesmaid, never the bride.
 
But that may be set to change as speculation is rife that a U.S. ether ETF may be in the offing.
 
Traders are already positioning for a surge in ether prices on bets that the U.S. Securities and Exchange Commission will give the go-ahead next year for a U.S. ETF that would track the price of ether, the world’s second largest cryptocurrency by market cap.
 
Options, which allow bets to be placed on future price movements, suggest that traders anticipate ether rising by as high as US$15,000 by March next year.
 
After the ProShares Bitcoin Strategy ETF saw over US$1 billion in inflows, which saw the fund soak up the futures contracts that it uses to track the price of bitcoin, pushing bitcoin to an all-time-high, investors are now betting the same could happen for ether as soon as next year.
 
Options contracts which give investors the right but not the obligation to buy ether at US$15,000 next year have seen a surge in interest.
 
The successful launch of the ProShares Bitcoin Strategy ETF has heightened expectations that similar futures-backed bitcoin products from over 20 other applicants will be approved in the coming weeks and months.
 
Nonetheless, the path to an ether ETF isn’t a given.
 
Earlier this year, both ProShares and VanEck withdrew applications for a ether ETF, without explaining the reason and thin trading in the futures market for ether could be a stumbling block to approving an ether futures-backed ETF.
 
But as with so many things in the cryptocurrency space, volumes can change on a dime, and it’s entirely possible for ether futures activity to pick up suddenly, especially as open interest in CME Group’s bitcoin futures rose sharply in the wake of the ProShares Bitcoin Strategy ETF launch. 
 
 

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Oct 29, 2021

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