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Novum Alpha - Daily Analysis 16 November 2021 (10-Minute Read)

The global equity rally has paused near record highs on growing misgivings over whether policy makers are making an error by treating elevated price pressures as transitory.

 
A terrific Tuesday to you as stocks tend lower on growth and pandemic concerns. 
 

In brief (TL:DR)

 
  • U.S. stocks opened Monday lower with the Dow Jones Industrial Average (-0.04%), S&P 500 (-0.00%) and tech-centric Nasdaq Composite (-0.04%) all slightly down.
  • Asian stocks were steady Tuesday as traders weighed inflation risks and monitored the first face-to-face virtual summit between U.S. President Joe Biden and Chinese leader Xi Jinping for clues over confrontation vs cooperation. 
  • Benchmark U.S. 10-year Treasury yields were down one basis point to 1.60% (yields fall when bond prices rise). 
  • The dollar pared gains.
  • Oil rose as investors wait to see if the Biden administration will tap crude reserves with December 2021 contracts for WTI Crude Oil (Nymex) (+0.80%) at US$81.53.
  • Gold was higher with December 2021 contracts for Gold (Comex) (+0.17%) at US$1,869.80. 
  • Bitcoin (-6.12%) fell to US$61,661 in Asian trading on Tuesday as technical indicators suggest the cryptocurrency has been overbought and on concerns over taxes for cryptocurrency reporting in Biden's infrastructure bill that has been signed into law. 
 

In today's issue...

 
  1. Oil Could Technically Go Anywhere Next
  2. Japanese Economy Shrinks to Show What Stagflation Could Look Like
  3. Bitcoin Falls to US$60,000 – Healthy Correction or Capitulation?

 

Market Overview

 
The global equity rally has paused near record highs on growing misgivings over whether policy makers are making an error by treating elevated price pressures as transitory.
 
Robust spending on merchandise should continue to put pressure on global supply-chains, which are already straining to keep up.
 
The U.S. and China are aiming to stabilize their relationship but downplaying hopes of major breakthroughs.
 
In Asia, markets were in a mixed bag Monday with Tokyo's Nikkei 225 (+0.11%) and Hong Kong's Hang Seng (+1.27%) up, while Sydney’s ASX 200 (-0.67%) and Seoul's Kospi Index (-0.08%) were down.
 
 

1. Oil Could Technically Go Anywhere Next

 
  • Pump prices in California have surged to a record and pressure is growing on the Biden administration to act fast since oil hit a 7-year high over US$85 a barrel last month.
  • Some traders are betting that the oil rally may just be beginning especially given the extremely tight spot markets for physical delivery.
 
Visitors to the U.S. may be surprised to find that most gas stations require you to pay for the fuel you want before you get to fill the tank and lately, if they want a full tank of gas, they’ll need to pay a lot more.
 
With oil advancing over US$81 a barrel for the benchmark West Texas Intermediate, traders are waiting to see whether the Biden administration will release crude from the U.S. emergency reserves to tackle soaring gasoline prices.
 
Pump prices in California have surged to a record and pressure is growing on the Biden administration to act fast since oil hit a 7-year high over US$85 a barrel last month.
 
Oil prices haven’t broken out yet because of uncertainty over what Biden plans to do next and whether a resurgent pandemic may end up crimping demand.
 
OPEC and its allies including Russia have remained circumspect over the recent spike in crude oil prices, with the cartel sticking to gradual output increase.
 
And that stance could make matters worse for already persistent inflation, supply chain snarls and soaring transportation costs.
 
Fresh outbreaks at key ports in China mean that freight rates have slowed to a crawl even as factories are working at reduced capacity thanks to brown outs and a shortage of components.
 
Raw material prices are soaring and in the U.S., headline inflation has been over 5% for six months in a row.
 
Washington could technically help to alleviate energy prices and even though that won’t fix inflation, it will at least take some of the price pressure off.
 
But some traders are betting that the oil rally may just be beginning especially given the extremely tight spot markets for physical delivery.
 
To be sure, the demand for physical oil is real and with the vaccinated world more or less open up, the prospect of a collapse in demand is less likely, while oil producers will be looking to recoup at least some of their losses from the pandemic.
 

 

2. Japanese Economy Shrinks to Show What Stagflation Could Look Like

 
  • According to government data released yesterday, the Japanese economy shrank at an annualized rate of 3% in the third quarter, far worse than economist forecasts of a 0.8% contraction.
  • Compared to other advanced economies, Japan’s pandemic recovery has been notably underwhelming.
     
Japan is no stranger to stagflation, they’ve had decades of it, low growth with soaring prices.
 
Dubbed Japan’s “lost years,” it is a period in the country’s economic history that most Japanese would rather forget.
 
The product of decades of leveraged bets on the Japanese property market, real estate values soared ahead of GDP to create an unsustainable bubble that after it collapsed, left the Japanese economy middling for years.
 
Which is why the shrinking in Japan’s economy during the third quarter, blamed largely on global supply chain disruptions and a resurgent Covid-19 pandemic, should be disconcerting.
 
Dampened spending by both consumers and businesses in Japan caught economists by surprise as freshly appointed Prime Minister Fumio Kishida prepared to unveil a big stimulus package of cash handouts and subsidies for struggling households and small businesses.
 
According to government data released yesterday, the Japanese economy shrank at an annualized rate of 3% in the third quarter, far worse than economist forecasts of a 0.8% contraction.
 
Major Japanese exporters, including Toyota and Honda were hamstrung by chip shortages and a rise in Covid-19 cases in southeast Asia.
 
Consumer spending in Japan also fell 4.5%, the first contraction in five quarters.
 
Compared to other advanced economies, Japan’s pandemic recovery has been notably underwhelming.
 
While the U.S. expanded 2% on an annualized basis in the third quarter, despite supply chain disruptions, Japan has failed to shrug off supply chain woes.
 
But compounding efforts by the Japanese government to get households to spend has been a cultural propensity to save, with many economists noting that past handouts have ended up in bank savings accounts where they lie fallow.
 
Kishida is said to be planning a distribution of around US$878 in cash and coupons to households, students and temporary workers hardest hit by the pandemic, but whether that does anything to spur domestic consumption remains to be seen.
 
The Japanese still have the years of economic malaise still fresh in their minds, and rising prices coupled with slowing growth isn’t likely to turn Japanese savers into shoppers overnight.
 

Find out more about Novum Alpha as leading luxury portal Luxuo.com interviews our CEO & General Counsel, Patrick Tan...

 

 

 

3. Bitcoin Falls to US$60,000 - Healthy Correction or Capitulation?

 
  • The global market cap for cryptocurrencies slid below US$3 trillion with bitcoin and ether nearing their lowest levels this month
  • Some are attributing the broad market dip to new tax-reporting requirements for cryptocurrencies that are part of the US$550 billion infrastructure bill which U.S. President Joe Biden signed into law on Monday.
 
It would be naïve to think that cryptocurrency prices travel in only one direction.
 
With many of the use cases of the nascent asset class still being ironed out, a sharp pullback in cryptocurrency prices was more a matter of “when” rather than “if.”
 
The global market cap for cryptocurrencies slid below US$3 trillion with bitcoin and ether nearing their lowest levels this month.
 
Some are attributing the broad market dip to new tax-reporting requirements for cryptocurrencies that are part of the US$550 billion infrastructure bill which U.S. President Joe Biden signed into law on Monday, but none of that comes as a surprise.
 
The cryptocurrency reporting requirements in the U.S. infrastructure bill had been there from early on, but nevertheless it doesn’t take much to spook skittish cryptocurrency investors as traders exited their positions on concerns over regulation and taxation.
 
Yet viewed from another lens, nothing quite legitimizes an asset class as much as a tax.
 
Another reason cited for the recent correction has been Beijing’s continued crackdown on its cryptocurrency sector, with reports that regulators are studying the option of levying punitive power prices for companies that are involved in mining.
 
Yet most major cryptocurrency mining facilities have already left the Middle Kingdom, and what punitive power prices that are levied on the hardcore remnant cryptocurrency miners is unlikely to affect hashrate (the measure of computing power used to secure a blockchain).
 
As an asset class though, bitcoin and ether have been on a tear this year, with the former doubling and the latter up about six times.
 
Last week the top two cryptocurrencies set fresh all-time-highs against a backdrop of seemingly insatiable demand for digital assets driven by both speculative demand and alleged inflation-hedging properties.
 
Nevertheless, there were more than a handful of technical indicators that suggested the recent cryptocurrency rally was due for a pause and to be fair, it wouldn’t be crypto if there wasn’t some drama to spice things up.
 
 

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 16, 2021

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