Novum Alpha

Novum Alpha - Weekend Edition 13-14 November 2021 (10-Minute Read)

Inflation pressures continue to reverberate through markets even as U.S. equities climbed on the back of unbridled optimism over the economic recovery. At its core, even as the U.S. Federal Reserve tapers asset purchases, the central bank has reaffirmed that it is in no rush to raise interest rates.

A wonderful weekend to you as stocks bounced back headed into the weekend.

In brief (TL:DR)

U.S. stocks rebounded Friday with the Dow Jones Industrial Average (+0.50%), S&P 500 (+0.72%) and tech-centric Nasdaq Composite (+1.00%) all higher up, but snapping a weekly winning streak, finishing with slim losses.
Asian stocks closed higher on Friday as sentiment on China improved.
Benchmark U.S. 10-year Treasury yields were more or less unchanged at 1.566% (yields fall when bond prices rise).
The dollar fell amid caution triggered by a U.S. warning that Russia may be weighing a potential invasion of Ukraine.
Oil continued a slide with December 2021 contracts for WTI Crude Oil (Nymex) (-0.98%) at US$80.79.
Gold recovered with December 2021 contracts for Gold (Comex) (+0.25%) at US$1,868.50.
Bitcoin (-0.61%) slid to US$63,527 as inflows pushed ahead of outflows and on profit taking with a lack of positive news to drive a sharper rally (inflows suggest that traders are looking to sell bitcoin in anticipation of lower prices).

In today's issue...

The FOMO Trade is Real
Chinese Tech Stocks Tempting Traders Back Into the Market
Crypto-Stocks Rally Alongside Cryptocurrencies

Market Overview

Inflation pressures continue to reverberate through markets even as U.S. equities climbed on the back of unbridled optimism over the economic recovery.

At its core, even as the U.S. Federal Reserve tapers asset purchases, the central bank has reaffirmed that it is in no rush to raise interest rates.

Along with the Bank of England, and likely the European Central Bank, the core cluster of central banks have reiterated their policy stances and held steadfast to keeping rates lower.

Continued loose monetary policy and strong corporate earnings are helping to fuel an unprecedented rally in global stocks, even as U.S. equities marked their first down week since October.

In Asia, markets rose rose almost uniformly headed into the weekend, with Tokyo's Nikkei 225 (+1.13%), Hong Kong's Hang Seng (+0.32%), Sydney’s ASX 200 (+0.83%) and Seoul's Kospi Index (+1.50%) all higher, buoyed by a recovery in Chinese stocks.

1. The FOMO Trade is Real

Loose monetary policy and robust corporate earnings are fueling an unprecedented stock market rally
Investors are piling in on risk assets for fear of missing out

Stocks keep going up, cryptocurrencies keep going up and against this backdrop, central banks (at least the ones that matter) have deigned it premature to pull back on pandemic policies that have seen the global financial system awash with liquidity and even the hairiest bears throw in the towel.

With Wall Street the epicenter, the MSCI All-World share index, a measure of global equities, has doubled since the pandemic crisis last March, marking one of the most powerful runs for global equities in recorded history (because maybe cavemen also traded skins and meat stocks).

According to Bank of America (-1.22%), the benchmark S&P 500 has sealed off its longest streak of hitting record highs before pulling back slightly since 1964.

Meanwhile, cryptocurrencies, a hitherto much maligned and nascent asset class has roared to a market capitalization of around US$3 trillion.

Analysts and investors say that an important driver of the rally has been the deluge of stimulus measures taken by global central banks to steady the world economy during the depths of the pandemic last year, but which has also helped fuel a robust rebound in the economy.

That rally has since seen many low-risk assets like highly-rated sovereign and corporate bonds offering scant returns and in many cases, even yields that are deeply negative when inflation is taken into account.

Some suggest that the rise of retail investing through the gamification of trading by brokerage apps like those of Robinhood Markets (+3.04%) may have also created “sticky” behaviors and even though pandemic restrictions are lifting, investors of more modest means still remain engaged.

Where this may be most prevalent is in the options market, which retail-facing digital brokerages have made more accessible.

As recently as November 5, some US$2.6 trillion worth of options, derivatives that allow investors to make magnified bets on or against stocks through leverage, traded hands in the U.S. alone, the highest trading volume on record, according to Goldman Sachs (+0.64%).

Option trading volumes are now also about 50% more active in nominal dollar terms than all actual stock trading.

But just when you thought stocks couldn’t get any higher, the blackout period for U.S. corporate buybacks after quarterly earnings is about to expire and these are likely to result in an even more ferocious rally in the coming month.

Markets could well continue to rock new records, even in 2022.

And there’s reason enough to believe this will happen.

For starters, bond traders were caught by surprise when the Bank of England, which almost everyone had expected to raise rates in response to inflation and Brexit, declined to do so.

And despite headline inflation over 5% for the past six months in the U.S., the U.S. Federal Reserve has remained steadfast in keeping rates right where they are.

Central bank ambivalence to rising prices and rocketing asset markets in and of itself would be sufficient to push risk assets higher, but throw in fundamentals, and the powder keg for stock prices could blow wide open.

Even though FOMO or the fear of missing out prevails, overall valuations are not overstretched and margins remain good.

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2. Chinese Tech Stocks Tempting Traders Back Into the Market

Chinese tech stocks rebound as investors reckon that the worst of regulatory action against the sector may be over
Chinese tech giants remain well off their most recent highs and provide strong potential upside for investors

Despite a crackdown on Chinese tech firms, covering everything from afterschool education to ride hailing, some strategists are of the view that their stock prices may have bottomed out, providing lucrative opportunities for the plucky investor.

Buckling under the weight of Beijing’s wrath for most of the year, the Nasdaq Golden Dragon China Index has risen 16% in the past month alone and while it’s still down 45% since hitting a record in February, a move which saw some US$500 billion in market capitalization wiped out, some are calling an inflection point on Chinese tech firms.

In a note to clients, Goldman Sachs strategist Kinger Lau wrote,

“The worst is likely behind us in terms of the regulation intensity and the corresponding shocks to the market.”

There may be some merit to this view.

Although China may have wanted to put its tech firms on the rope, to remind them who’s ultimately the boss – the Chinese tech economy isn’t mortal combat and it’s unlikely that Beijing may have wanted to finish off its tech firms entirely, for whom it relies on for many of the Orwellian policies that it implements.

Last month, a top Chinese financial watchdog hinted that it may be laying off its crackdown on tech firms, stating that it expects to achieve significant progress in crackdowns against fintech firms before the end of the year.

The prospect of Chinese President Xi Jinping ruling for life may also usher in a period of policy continuity and fewer regulatory surprises in the future.

Ahead of any coronation in Chinese history, the Crown Prince has been known to flex his muscles before ascending the dragon throne and Xi may be no different in his crackdown on Chinese tech firms.

Last Thursday alone, Nasdaq’s Golden Dragon China Index rose 5.1%, against a backdrop of positive news in the Chinese tech sector that may have boosted investor confidence and appetite in Chinese tech stocks.

China’s e-commerce juggernaut Alibaba Group Holding (-0.62%) and rival JD.com (+2.08%) Singles’ Day shopping festival posted record sales while it’s been said that Didi Global (+6.14%), whose IPO in New York is said to have sparked off China’s tech purge, will be relaunching its ride-hailing apps in China by the end of the year, to end a months’ long ban.

Given that Chinese tech stocks have a long way to recover from this year’s rout, with Alibaba Group Holdings and search engine Baidu both trading at more than a 30% discount to average analyst price targets, a rally in the sector is entirely possible.

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3. Crypto-Stocks Rally Alongside Cryptocurrencies

Cryptocurrency stocks continue to rise despite lower-than-expected earnings for the third quarter
Crypto-stock investors need to brace for more volatility as the underlying asset's volatility bleeds over into crypto-related equities

A rising tide lifts all boats and a broad-based surge in cryptocurrency prices has also lifted the fortunes of the stocks of companies closely related to the sector.

Despite missing earnings estimates, shares of companies from cryptocurrency exchange Coinbase Global (+1.96%) to mining firm Marathon Digital Holdings (+7.40%) all marked sharp rebounds by the end of last week, despite sharp falls earlier in the week.

Coinbase Global, the biggest cryptocurrency exchange in the U.S. spooked investors earlier in the week after third quarter earnings contracted more than Wall Street anticipated, falling by as much as 8.1% immediately after reporting earnings, before closing to end the week just -1.87% lower.

Marathon Digital Holdings meanwhile fell almost 15% on Wednesday, before rebounding sharply to end the week up 5.72%.

Cryptocurrency stocks may simply be experiencing the same volatility inherent to the underlying assets that they serve.

A closer examination of the decline in revenues for Coinbase Global also reveals that the fall was due to a stronger focus on institutional traders, while retail trading languished, but which will prove the more smart move in the long term.

Although retail investors pay more in terms of trading fees compared to institutional investors, who can typically negotiate favorable rates, the latter are also a more consistent presence in the market, because of the burdens involved with onboarding and adapting their processes for trading on any particular forum.

Crypto stock investors may be in for more volatility next week though, as Galaxy Digital Holdings (-3.24%) and Riot Blockchain (+11.79%) are set to report third quarter earnings.

To be fair, the third quarter was not a particularly stellar period for cryptocurrencies.

The announcement by the People’s Bank of China that all cryptocurrency transactions were deemed illegal sent markets into a sharp correction before rebounding when the U.S. Federal Reserve and U.S. Securities and Exchange Commission both expressed that they had no interest to ban cryptocurrencies.

Volatility was also particularly acute in the aftermath of the ProShares Bitcoin Strategy ETF listing in New York.

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Nov 13, 2021