Novum Alpha - Daily Analysis 15 November 2021 (10-Minute Read)
A magnificent Monday to you as markets move cautiously into the week with both reasons for cheer as well as caution.
In brief (TL:DR)
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In today's issue...
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Market OverviewRecent gyrations in bonds point to the worry that central banks will have to tighten policies more quickly than expected to curb sustained inflation.
In contrast, global stocks near record levels signal equity investors are reassured by corporate strength and arguments that price pressures are transitory.
Elsewhere, President Joe Biden will meet virtually with Chinese President Xi Jinping on Monday. Tensions between the two countries have been building over issues including Taiwan and restrictions on sales of U.S. technology to China.
In Asia, markets were in a mixed bag Monday with Tokyo's Nikkei 225 (+0.49%), Sydney’s ASX 200 (+0.21%) and Seoul's Kospi Index (+1.04%) higher, while Hong Kong's Hang Seng (-0.34%) was lower in the morning trading session.
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1. Short-Lived Emerging Market Dollar Carry Trade
It was good while it lasted but the short-lived reprieve for emerging market carry trades funded in dollars appears to be over with an upsurge in U.S. inflation making the “free lunch” incredibly poisonous.
Traders who had enjoyed it while it lasted were borrowing in dollars to invest in emerging market currencies, with rates higher in the latter compared with the former.
But the sharpest inflation in the U.S. in three decades is putting pressure on the Federal Reserve to tighten monetary policy, raising the prospect of higher borrowing costs for dollar borrowers and less yield, or carry – the difference between borrowing in dollars and investing in emerging market currencies.
Just two months ago, traders were making money hand over fist, comforted by the Fed’s dovish messaging around a gradual pace of policy tightening and piling on the carry trades which are now coming unglued, with concerns over inflation escalating.
Even as U.S. Federal Reserve Chairman Jerome Powell pledged to keep interest rates low for the foreseeable future last week, traders are not sticking around to find out and are likely to turn to the euro and yen for cheaper funding costs.
For now, both the yen and the euro are the worst performing G10 currencies this quarter and expectations are high that the Bank of Japan and European Central Bank will maintain their accommodative policy stance.
Some of the most lucrative trades from central banks which had raised rates are now bleeding.
Borrowing in dollars to bet on Turkish lira has lost 11%, while investments in the South African rand has dropped over 6%.
But not all emerging market currencies have been losers, with the Argentine peso carry trade returning 7%.
All is not lost though as there remains the prospect emerging market central banks will raise rates further to cater for rising inflationary pressures to generate sufficient yield premium to improve carry returns.
Policy decisions from the Turkish, Indonesian, Filipino and Hungarian central banks are due this week and could provide fresh opportunities.
Bloomberg Intelligence suggests that the outlook for carry appears more attractive in the Americas, Europe, Middle East and Africa than it does for Asia at the moment with the Turkish lira, Russian ruble and Mexican peso likely to generate the best returns compared with the Indian rupee and Indonesian rupiah.
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2. Hong Kong's Property Market is White Hot
Forget about the protests, pandemic and pressure from Beijing, Hong Kong’s property market is burning white hot even as the city remains mostly shut off from the rest of the world, buoyed by buying interest from mainland Chinese businesspeople.
Over the weekend, two apartments were sold by Wheelock, the real estate group of billionaire Peter Woo, in Hong Kong’s glitzy Peak for US$154 million, setting an Asian record for price per square foot.
Hot on the heels of the Peak sale, property group Wharf Holdings rented out a luxury home for a whopping US$173,257 a month.
Despite facing a series of challenges that have brought into question Hong Kong’s status as an international financial center, the property market remains hot.
A tough national security law imposed by Beijing on the autonomous territory, as well as some of the strictest pandemic restrictions in Asia, with a three week quarantine the standard to enter the city, has led to an outflow of residents, with a 1.2% decline for the first half of this year.
But a chronic shortage of land in the mountainous topography that is Hong Kong and alleged hoarding of land banks by property developers have been compounded with policy missteps to ensure property prices have remained robust.
And a growing number of Chinese entrepreneurs who have businesses in southern China have opted to live in Hong Kong as well, fueling demand for high end properties in the already land scarce enclave.
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Find out more about Novum Alpha as leading luxury portal Luxuo.com interviews our CEO & General Counsel, Patrick Tan...
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3. U.S. Bitcoin Futures Good, Spot Bad
In an unsurprising move, the U.S. Securities and Exchange Commission has thrown out VanEck’s bitcoin-backed ETF, claiming dissatisfaction with the latter’s plan to prevent “fraudulent and manipulative acts” from reaching regulated markets.
Last Friday, the SEC rejected a high-profile attempt to list an actual bitcoin-based ETF on Wall Street, citing concerns over the potential for fraud in the cryptocurrency markets to spill over into regulated exchanges, claiming that it was necessary to “protect investors and the public interest.”
Among the concerns raised by the SEC, was the possibility of “wash trading,” where the same counterparty is on both sides of the trade, to generate the impression that a more active market exists than is real, while generating extra fees for minimal risk.
The SEC said that potential price manipulation by so-called bitcoin “whales” who hold large amounts of the cryptocurrency, could also possibly engage in “manipulative activity” in conjunction with the stablecoin Tether.
While some bitcoin maximalists were hopeful that a U.S. bitcoin-backed ETF would be a possibility after the successful launch of the ProShares Bitcoin Strategy ETF which is backed by CME Group’s cash-settled bitcoin futures, the latest SEC ruling has tempered those expectations and is a reminder that the road to a genuine bitcoin ETF has been and continues to be a long one.
As far back as 2013, the Winklevoss twins (of Facebook fame) have been lobbying to launch a bitcoin-backed ETF, but been roundly and repeatedly rejected by the SEC over concerns similar to those that were thrown back at the VanEck application.
Even so, Canada and Europe already have spot cryptocurrency ETFs and VanEck is said to be looking to launch the first such product in Australia soon.
However, none of these markets are as deep or as liquid as Wall Street, which is why it remains the Holy Grail for a bitcoin ETF.
Speculation that a spot bitcoin ETF would be approved by the SEC pushed bitcoin higher midweek, racing towards a fresh all-time-high, before the rejection of the VanEck application saw a correction back to around US$63,000 into the weekend.
The SEC has remained consistent in its rejection of a spot-based bitcoin ETF, given that it remains concerned over the lack of a major regulated exchange for bitcoin.
Regulators have said the primary listing exchange for a bitcoin ETF would need to have a comprehensive agreement with a large regulated market related to bitcoin, so that the SEC could monitor that market for potential manipulation or fraud, a goal that remains elusive for now.
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Nov 15, 2021