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Novum Alpha - Daily Analysis 1 November 2021 (10-Minute Read)

Global shares have so far shrugged off risks and remain close to all-time peaks, supported by company earnings even as inflationary pressures mount.

 
A magnificent Monday to you and a great start to your month of November! 
 

In brief (TL:DR)

 
  • U.S. stocks finished fine on Friday with the Dow Jones Industrial Average (+0.68%), the S&P 500 (+0.98%) and tech-centric Nasdaq Composite (+1.39%) putting in a strong showing for the month of October.  
  • Asian stocks rose Monday after the outcome of Japan’s election bolstered expectations for fiscal stimulus and as fresh all-time highs for U.S. shares encouraged some investor optimism.
  • Benchmark U.S. 10-year Treasury yields added two basis points to 1.57% (yields rise when bond prices fall) as risk sentiment was back on the table. 
  • The dollar was steady.
  • Oil retreated with December 2021 contracts for WTI Crude Oil (Nymex) (-0.31%) at US$83.31 as pressure mounts on OPEC+ to boost production when it meets on Thursday.
  • Gold was higher with December 2021 contracts for Gold (Comex) (+0.17%) at US$1,786.90. 
  • Bitcoin (-1.21%) fell to US$61,419 but remains above key support levels and flows are even in either direction (inflows suggest that investors are looking to sell bitcoin in anticipation of lower prices). 
 

In today's issue...

 
  1. Surge in U.S. Wages Threatens Transitory Inflation Story
  2. China’s “Common Prosperity” Could Create “Common Poverty”
  3. The US$532 billion NFT Sale That Wasn’t

 

Market Overview

 
Global shares have so far shrugged off risks and remain close to all-time peaks, supported by company earnings even as inflationary pressures mount. 
 
Fixed-income market upheavals suggest investors anticipate a slowdown in the recovery from the pandemic as price pressures lead central banks to pare back economic support.
 
The stress in China’s property sector also remains in focus and at least four other Chinese developers have defaulted on their bonds over the last month. China Evergrande Group twice averted that fate by paying overdue coupons at the 11th hour, but time is fast running out even as the Chinese economy begins to slow dramatically.
 
In Asia, markets were mostly higher Monday with Tokyo's Nikkei 225 (+2.31%), Sydney’s ASX 200 (+0.68%) and Seoul's Kospi Index (+0.51%) up, while Hong Kong's Hang Seng (-1.10%) was down in the morning trading session because of poor Purchasing Manager's Index data out of China on Sunday. 
 
 

1. Surge in U.S. Wages Threatens Transitory Inflation Story

 
  • U.S rising wages are threatening to derail the central bank narrative that inflation is only transitory.
  • In other words, wages across the board are rising fast, even as millions of Americans remain out of work.
 
First it was the supply chain, then it was commodities, now it’s rising wages that are threatening to derail the central bank narrative that inflation is only transitory.
 
Whereas snarled supply chains can be mended and commodity prices can be moderated, wages when lifted, tend to provide a more persistent source of pressure on companies to increase prices.
 
In data released last Friday, the U.S. Labor Department, noted that the Employment Cost Index (ECI), a broad gauge of wages and benefits, rose a whopping 1.3% from the previous quarter and was up 3.7% from a year earlier.
 
Gains in wages were broad based, and unlike the average hourly earnings figures in the monthly jobs report, the ECI isn’t affected by employment shifts across industries and occupations, something that’s distorted data because of the pandemic.
 
In other words, wages across the board are rising fast, even as millions of Americans remain out of work.
 
The contradictory data of businesses struggling to hire and retail enough workers to cater to resurgent demand comes amidst persistently high unemployment and some companies are already raising prices to offset increased labor costs.
 
Casual eatery chain Chipotle Mexican Grill (+0.079%) and Tesla (+3.43%) have both increased prices to offset higher wage and material costs, fueling concerns that rapid wage increased could lead to a wage-driven inflationary spiral.
 
But both Chipotle Mexican Grill and Tesla are examples of companies which have the leeway to pass on higher costs to consumers, as they cater to middle and upper middle income earners, for whom slight price increases is not likely to dampen demand.
 
Other companies like Starbucks (-6.30%) may be able to do the same.
 
Despite healthy profit margins, not all companies will have the luxury to pass on increased wage and material costs to consumers, especially at the lower end of the market.
 
For now, the jury is still out on whether increasing wages will draw more workers into the U.S. labor market and help to moderate costs, or if higher salaries will provide yet another catalyst for inflation and pressure the U.S. Federal Reserve to raise interest rates earlier than anticipated.
 

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2. China's "Common Prosperity" Could Create "Common Poverty"

 
  • Manufacturing activity in China is shrinking to a point where things could get testy for Chinese President Xi Jinping’s “common prosperity” push.
  • Chinese President Xi’s unprecedented economic and social reforms are creating a wave of poor economic data that is putting pressure on Beijing to ease off on the offensive.
 
In further proof that a national economy isn’t a thermostat that you can adjust however you like, manufacturing activity in China is shrinking to a point where things could get testy for Chinese President Xi Jinping’s “common prosperity” push.
 
The rationale for “common prosperity” of course is to reduce inequality in the Middle Kingdom, but a crackdown on tech companies, afterschool education, property, gaming, entertainment and power generation, all at once, is increasing the risk of “common poverty.”
 
In official data released on Sunday, China’s Purchasing Manager’s Index, a tool commonly used for determining economic activity was 49.2, below the 50-point threshold which indicates contraction instead of expansion.
 
Chinese President Xi’s unprecedented economic and social reforms are creating a wave of poor economic data that is putting pressure on Beijing to ease off on the offensive.
 
Especially worrying for millions of ordinary Chinese is the crackdown on the property sector, which makes up 70% of the Chinese economy and around 29% of GDP.
 
China’s economic woes are being made all the worse by inflationary pressures, as prices for industrial input materials, including oil, coal, chemicals and metals, continue to soar.
 
Third quarter growth in the world’s second largest economy has also slumped to its slowest pace in a year, as Beijing’s reforms continue in earnest.
 
For an economy that was one of the first to emerge from the pandemic and apparently ascendent and confident, internally things are looking a bit of a mess.
 
Everything from computer chip shortages to overstretch supply chains are hammering manufacturing activity, the bedrock of the Chinese economy, even as regular brownouts threaten to plunge Chinese factories and homes into darkness ahead of the winter months.
 
Tough financial and regulatory policies in the property sector may also lead to a Chinese economic crisis of Beijing’s own creation, with depressed wages and a declining property sector feeding on itself and threatening to derail the Chinese economic miracle.
 
The worst outcome for China now would be stagflation, soaring prices coupled with slowing growth, the ultimate reward for economic mismanagement.
 
Better leave that thermostat alone.
 

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3. The US$532 billion NFT Sale That Wasn't

 
  • When CryptoPunk 9998 was alleged to have sold for half a billion U.S. dollars’ worth of ether, naturally there were many who believed that the NFT bubble was still well and truly alive.
  • A closer inspection showed that the ether from the NFT trade ended up right back where it started – a process known in the financial world as “wash trading.”
 
NFTs or non-fungible tokens, commonly built on the ERC-721 standard atop the Ethereum blockchain have been soaring in popularity.
 
Earlier this year, payments giant Visa purchased CryptoPunk 7610 (the one with the red lipstick) for around 49.5 ether, or around US$200,000 at the time.
 
So when another CryptoPunk 9998 was alleged to have sold for half a billion U.S. dollars’ worth of ether, naturally there were many who believed that the NFT bubble was still well and truly alive.
 
Except that it wasn’t.
 
A closer inspection showed that the ether from the NFT trade ended up right back where it started – a process known in the financial world as “wash trading.”
 
Allegedly, the process started when someone using an Ethereum address starting with 0xef76 transferred CryptoPunk 9998 to an address starting with 0x8e39 and around thirty minutes later, 0x8e39 sold the NFT to an address starting with 0x9b5a for 124,457 ether, worth around US$532 million at the time, all of which was borrowed from three sources, primarily Compound, a decentralized lending platform.
 
To pay for the trade, the buyer, 0x9b5a, sent 124,457 ether to CryptoPunk 9998’s smart contract, which transferred the ether back to the seller 0x8e39, who then sent the ether back to the buyer 0x9b5a, who repaid the loans.
 
Finally, the complete the apparently meaningless round trip, CryptoPunk 9998 was sent back to the original address 0xef76, who then proceeded to offer the NFT up for sale again, except this time the price had increased to 250,000 ether.
 
The entire process is possible because of so-called “flash loans” which are enabled by the Ethereum blockchain, where a loan can be taken, used to pay for something and repaid all within the same block, meaning that no interest is paid, and no collateral is necessary.
 
But this is hardly the first time that such large bids have been used to goose up NFT bids and lure in the unsuspecting.
 
Because the ether is offered and rejected in a single transaction, the bid is briefly valid even though it can never be accepted and for those who are unfamiliar with the NFT ecosystem, may be misinterpreted as a genuine offer for an NFT.
 
Larva Labs, which created the CryptoPunks said on Twitter that they would ensure their notification system would filter out such transactions in future and prevent them from being notified.
 
Yet while large bids like the one for CryptoPunk 9998 would immediately attract attention and greater scrutiny, far smaller bids may go unnoticed and lure in unsuspecting NFT buyers into paying more for an NFT than they would have otherwise.
 
In the market for regulated securities, a transaction like the one for CryptoPunk 9998 would be the equivalent of wash trading, which is banned on the grounds that trading with yourself can artificially inflate prices and suggest there is more demand than actually exists.
 
And because in the crypto markets, the only thing expended is gas (transaction) fees, there is a strong economic incentive for holders of NFTs to engage in this sort of wash trading to artificially create the impression of an active market for a token when none otherwise exists.
 
 

What can Digital Assets do for you?

 
The 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 is pleased to announce its first month of trading has gotten off to a good start, with a return of +2.19% for September 2021, a month which saw the benchmark Bloomberg Galaxy Crypto Index decline by -11.31%
 
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.  

Nov 01, 2021

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