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Novum Alpha - Daily Analysis 5 November 2021 (10-Minute Read)

A fabulous Friday to you as markets continue to find their footing with the Bank of England keeping rates low bringing plenty of good cheer.

 

In brief (TL:DR)

 
  • U.S. stocks continued to rise Thursday with the Dow Jones Industrial Average (-0.09%) down slightly, while the S&P 500 (+0.42%) and tech-centric Nasdaq Composite (+0.81%) were higher as the Bank of England and U.S. Federal Reserve dovishness played into risk sentiment.  
  • Asian stocks paused the rally Friday amid a tumble in bond yields triggered by scaled back expectations about the likely pace of monetary policy tightening to quell inflation.
  • Benchmark U.S. 10-year Treasury yields rose about one basis point to 1.52% (yields rise when bond prices fall).
  • The dollar held a climb. 
  • Oil rose with December 2021 contracts for WTI Crude Oil (Nymex) (+1.12%) at US$79.69. 
  • Gold was higher with December 2021 contracts for Gold (Comex) (+0.18%) at US$1,796.80. 
  • Bitcoin (-0.36%) fell to US$62,193 on profit-taking with inflows pipping outflows (inflows suggest that traders are looking to sell bitcoin in anticipation of lower prices).   
 

In today's issue...

 
  1. Where could China’s Crackdown hit next?
  2. Bank of England Shocks Bond Traders by Keeping Rates
  3. Need a Job? How about Crypto?
 

Market Overview

 
The focus turns to the U.S. jobs report due Friday since the level of progress on employment could shift views on monetary policy again, heralding further potential volatility in the bond market.
 
Stocks are riding out such gyrations so far: solid U.S. earnings appear to have reassured investors that the economic recovery can weather pandemic-related supply chain and labor disruptions.
 
In China, investors are monitoring Kaisa Group Holdings Ltd. for the next flashpoint in the property sector.
 
In Asia, markets were lower Friday with Tokyo's Nikkei 225 (-0.63%), Seoul's Kospi Index (-0.75%) and Hong Kong's Hang Seng (-0.91%) down, while Sydney’s ASX 200 (+0.52%) was up in the morning trading session.
 
 

1. Where could China's Crackdown hit next?

 
  • From online tutors to technology, real estate to gaming, Beijing’s policy moves have sparked a selloff that at its nadir saw US$1 trillion in market cap wiped off Chinese stocks.
  • Yet after a tough year, there are still many issues that remain unresolved, not least of which is Chinese President Xi Jinping securing a third term.
 
Trying to discern the next move of the Chinese Communist Party is a bit like trying to read tea leaves, they can’t tell the future insomuch as provide you with a portrait of hindsight.
 
From online tutors to technology, real estate to gaming, Beijing’s policy moves have sparked a selloff that at its nadir saw US$1 trillion in market cap wiped off Chinese stocks.
 
The MSCI China Index is down 15% this year, well behind global shares by the most since 1988, even as Chinese President Xi Jinping is trying to remodel the economy, address inequality and shore up his grip on an unprecedented third term in power.
 
Now at its one-year mark, there are signs that the crackdown may be slowing as even the most conservative Communist Party apparatchiks were surprised by the economic consequences of some of their measures.
 
Yet after a tough year, there are still many issues that remain unresolved, not least of which is Chinese President Xi Jinping securing a third term.
 
While many China observers assume that with the removal of term limits, Xi has all but cemented his inevitable appointment for a third term in power, nothing in China can be taken for granted.
 
China may not be a democracy, but Xi will still need the endorsement of the powerful Central Committee and more than 2,000 officials who will attend the 20th National Party Congress next year and it’s not a foregone conclusion he’ll clinch the top spot yet again.
 
Although there’s little indication that Xi will face a serious challenge, he still needs to keep China’s citizens happy and burnish his credentials as their leader, and recent moves to achieve so-called “common prosperity” may have been undertaken with plenty of revolutionary zeal, but somewhat less economic consideration.
 
Thumping down Alibaba Group Holding’s (-3.02%) IPO of Ant Financial may have won fans among the hoi polloi, but the smackdown of China’s property sector is having some far-reaching consequences that have startled even the most zealous revolutionary cadres.
 
With some 70% of the Chinese economy reliant on the property sector and around 29% of GDP, just as Xi has sought to visibly tie the fortunes of China to his stewardship, his high profile stamp of authority will also be associated with any failings.
 
China’s broad crackdown on a variety of industries could not have come at a more inconvenient time. Supply chain snarls and energy shortages affecting both factories and households are not peculiar to China alone but have been exacerbated by recent ill-advised policy moves.
 
And while the Chinese economy is large, there are limits to how many levers and dials policymakers can shift at once without upsetting the delicate equilibrium that is responsible for national prosperity or “common poverty.”
 
In growing signs that Beijing may have sought to do too much too quickly, ordinary Chinese are starting to suffer the stings of poorly thought-out policy measures.
 
The potential collapse of China Evergrande Group could pose systemic risks not just to investors and homeowners, but the wider Chinese economy.
 
Scattered protests by China Evergrande Group investors have also spilled over into discontent with shuttered factories from power shortages and declining wages.
 
The Chinese economy is growing at its slowest pace in decades and ordinary Chinese are starting to feel the stress of policy and politics.
 
When, rather than if, Xi gets his endorsement from the Central Committee, Taiwan could potentially come into play, especially if it proves impossible or inconvenient to roll back some of the economic measures rolled out earlier.
 
Because what better way to distract an increasingly challenging economic situation then some good old fashioned saber rattling?
 
The Communist Party’s goal of unification with Taiwan has so far offered up little progress and if nothing else, the democratically governed island is ideologically moving further away from China.
 
Hawks in the Central Committee may goad Xi into making long-term preparations for an invasion of Taiwan to force unification.
 
And while the odds of a conflict with Taiwan are not likely to occur anytime soon, the preparation of such a move would be the most damaging economically, with its consequences likely to ripple across the global economy.
 

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2. Bank of England Shocks Bond Traders by Keeping Rates Low

 
  • A decision by the Bank of England to continue holding interest rates at record lows caught investors by surprise and saw a strong rally in global bond markets.
  • With the U.S. economy on the mend, expectations are that a rate rise may only be due towards the latter half of next year.
 
With the U.S. Federal Reserve announcing a tapering of its asset purchases from this month, expectations were high that a Bank of England meeting yesterday would result in rate rises in response to inflationary pressures.
 
But a decision by the Bank of England to continue holding interest rates at record lows caught investors by surprise and saw a strong rally in global bond markets that saw traders who had spent weeks positioning for tighter monetary policy, nursing losses on short positions on bonds.
 
In further evidence that what central bankers do as opposed to what they say matters, the BoE confounded market expectations of a rate rise which had risen following a series of hawkish public statements from policymakers.
 
U.K. sovereign debt rallied sharply on the announcement that rock bottom low interest rates would be held at their current levels, with yields plummeting (yields fall when bond prices rise).
 
The BoE decision to maintain low rates has been speculated to be in response to the U.S. Federal Reserve’s steadfast resolve in the face of increasing price pressures and provided the perfect tee-up for equities in Europe and the U.S. to rally sharply and close at fresh all-time-highs.
 
Earlier this week, the Fed announced that it would be tapering its US$120 billion-a-month bond purchases by around US$15 billion, but that there was no urgency to raise rates just yet.
 
With the U.S. economy on the mend, expectations are that a rate rise may only be due towards the latter half of next year.
 

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3. Need a Job? How about Crypto?

 
  • According to a new ranking based on LinkedIn data, in the U.S., a majority of 53% of all crypto jobs are dispersed across cities across the country.
  • The global pandemic has seen cryptocurrency prices rally sharply and digital asset businesses blossom, while also demonstrating the viability of white-collar work being done from virtually anywhere in the world.
 
Although unemployment in the U.S. remains stubbornly high, one sector which has been on a hiring frenzy has been in digital assets.
 
Crypto jobs from Singapore to San Francisco are abundant and filled as quickly as qualified applicants are available.
 
And just like the decentralization of the blockchain, crypto jobs are literally everywhere.
 
According to a new ranking based on LinkedIn data, in the U.S., a majority of 53% of all crypto jobs are dispersed across cities across the country.
 
Unlike finance or technology, which are centered in hubs like New York and San Francisco, the ethos of decentralization has seen crypto entrepreneurs reject traditional boundaries or geographies.
 
Even the world’s largest cryptocurrency exchange Binance’s founder Changpeng Zhao or CZ as he’s known doesn’t hold himself to any specific location, despite settling into Singapore as home.
 
Despite being the world’s largest cryptocurrency exchange by traded volume, Binance has eschewed a corporate headquarters and has employees from across the globe.
 
That may be set to change however, as regulators circle around Binance and demand a more certain corporate structure by which the exchange should operate.
 
The global pandemic has seen cryptocurrency prices rally sharply and digital asset businesses blossom, while also demonstrating the viability of white-collar work being done from virtually anywhere in the world.
 
Crypto companies have long embodied the decentralization ethos, and it’s not uncommon for whole teams to have individual members dotted across the globe.
 
Improved communication tools such as Slack and Discord as well as software collaboration tools have all made it easier for a workforce to be remote and that’s helped many startups, particularly crypto companies, scale in a cost-effective way.
 
The shift in work practice, particularly for the crypto economy, means that sates with lower taxes, great infrastructure and good interconnectivity with other hubs stand to benefit from fully remote work.
 
Cities like Singapore are cottoning on to the trend, with the Director of the Monetary Authority of Singapore Ravi Menon revealing last week in an interview with Bloomberg that the financial hub intends to position itself as a cryptocurrency capital.
 
Meanwhile, the crackdown on cryptocurrency mining in China has seen such activities relocated across to other parts of the world, with a huge chunk headed to U.S. states like Virginia and Texas.
 
 

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 second month of trading has seen consistent performance, with a return of +13.22% for October 2021, to add to September 2021's performance of +2.19% 
 
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 05, 2021

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