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Novum Alpha - Daily Analysis 22 November 2021 (10-Minute Read)

A magnificent Monday to you as markets throw up a mixed bag at the start of Asian trading and Wall Street likely to see the same.

 

In brief (TL:DR)

 
  • U.S. stocks remained mixed on Friday with the Dow Jones Industrial Average (-0.75%) and S&P 500 (-0.14%) both down on weakness in cyclical stocks, while the tech-centric Nasdaq Composite (+0.40%) ended higher on anticipation of a fresh round of lockdowns. 
  • Asian stocks were mixed Monday amid concerns about European Covid-19 curbs and the risk of a quicker withdrawal of U.S. Federal Reserve stimulus.
  • Benchmark U.S. 10-year Treasury yields rose one basis point to 1.56% (yields fall when bond prices rise) but were otherwise flat.  
  • The dollar was steady. 
  • Oil extended declines on the prospect of key consumers adding emergency supplies as well as Europe’s Covid-19 flareup with January 2022 contracts for WTI Crude Oil (Nymex) (-0.59%) at US$75.49.
  • Gold fell with February 2022 contracts for Gold (Comex) (-0.24%) at US$1,849.90 on the back of a stronger dollar. 
  • Bitcoin (-2.19%) fell to US$58,024 in the middle of the weekend, as the prospect of a earlier-than-expected withdrawal of fiscal and monetary stimulus weighed on risk sentiment and inline with a broader decline in the markets. 
 

In today's issue...

 
  1. Amazon’s War with Visa Escalates
  2. China’s Central Bank Back to Easing
  3. Cryptocurrencies Are Exerting Pressure on Traditional Markets 24/7
 

Market Overview

 
Global equities overall remain near records, coping with a litany of worries including a winter wave of rising coronavirus cases and high inflation that is leading central banks to tighten monetary policy.
 
Other uncertainties include who President Joe Biden will pick as the Fed Chair nominee from Governor Lael Brainard and incumbent Jerome Powell, as well as the perennial saga over suspending or lifting the U.S. debt limit.
 
In China, yuan strength was also in focus after a currency panel urged banks to limit speculative foreign-exchange trading. An adviser to the nation’s central bank said the Chinese economy could enter a period of “quasi-stagflation.”
 
In Asia, markets were mixed Monday with Hong Kong's Hang Seng (-0.37%), Tokyo's Nikkei 225 (-0.23%) and Sydney’s ASX 200 (-0.46%) down, while Seoul's Kospi Index (+1.22%) was up headed into the week.
 
 

1. Amazon's War with Visa Escalates

 
  • Amazon (-0.53%) is saying that it will stop accepting U.K. Visa credit cards altogether from next year onwards.
  • Amazon has claimed that the move to punish Visa credit card customers was borne out of the latter’s high fees, but in the U.K. at least, Mastercard (-2.46%) and Visa (-1.17%) have nearly identical transaction fees.
 
If you’ve been shopping on Amazon.com of late, you may have noticed that it’s become a little more expensive and it’s not just because of supply chain issues.
 
For months now, Amazon has been levying a 0.5% surcharge for customers who use Visa to pay for their purchases in certain markets like Singapore and now the online retail giant is saying that it will stop accepting U.K. Visa credit cards altogether from next year onwards.
 
Amazon has claimed that the move to punish Visa credit card customers was borne out of the latter’s high fees, but in the U.K. at least, Mastercard and Visa have nearly identical transaction fees.
 
The e-commerce giant has also claimed that Visa adds little value while constantly increasing costs, including levying additional fees to guard against fraud in online sales, especially given Amazon’s trove of data and insight into consumers.
 
Visa makes the bulk of its money from routing payments and the challenge from Amazon is just the latest in a growing number of existential threats to the company that helped pioneer the credit card industry.
 
Digital and direct payments are already undercutting Visa’s market share and its effective duopoly with Mastercard is coming under pressure from both fintech competition and geopolitical pressure that wants to reign in their stranglehold on global payments.
 
While the cost of processing transactions has fallen sharply over the past few decades, fees have remained stubbornly high thanks to the dominant duopoly position of Visa and Mastercard as well as their popularity among customers.
 
And while payment networks and issuers can enjoy profit margins of as high as 50%, retail margins are close to 3%, creating an extremely unequal playing field.
 
Card companies like Visa contend that while they set interchange fees (the fee paid between banks for the acceptance of card-based transactions), they do not receive the bulk of those fees.
 
While merchants have railed against high transaction fees for decades, with some retailers in Australia even resorting to charging a surcharge to customers who use credit cards to pay, the rise of alternative payment providers is giving them more bargaining power.
 
Direct account payment systems using QR codes and digital payments now account for 13% of checkouts in Europe, according to a new report by consulting firm Accenture.
 
Meanwhile rivals like PayPal (-3.44%) have been building their own payment systems for years that do not rely on established networks that run on Visa and Mastercard.
 
And customers looking to purchase on credit now have digital options like buy now and pay later, with many of these payment plans enabled through APIs which facilitate secure connections to consumer financial data for third parties.
 
And while Visa and Mastercard are coming under pressure from regulators to cut fees, one area where they may gain an advantage is with cryptocurrencies.
 
Visa is working with cryptocurrency firms who have not hesitated to issue credit cards that allow spending of cryptocurrencies and companies like Crypto.com and exchange Binance.com have both issued their own Visa card.
 
 

2. China's Central Bank Back to Easing

 
  • The PBoC report dropped the phrase “control the valve on money supply” which suggests a stepped-up monetary easing.
  • Some analysts suggest that the PBoC will target easing towards small businesses, which have been most badly hit by the marked slowdown in economic growth and soaring production costs.
     
China was the first to experience the painful pandemic, the first to emerge (more or less) from lockdown and the first to see a resurgent economy.
 
But the world’s second largest economy has also become the first to see an economic slowdown and signaled a potentially more dovish policy as growth weakens.
 
In its latest quarterly monetary policy report published last Friday, the People’s Bank of China removed a few key phrases cited in previous reports in its policy outlook, including “normal monetary policy” which economists are interpreting as a precursor to more accommodative measures from the central bank.
 
Significantly, the PBoC report also dropped the phrase “control the valve on money supply” which suggests a stepped-up monetary easing.
 
Exacerbating matters, the Chinese renminbi, or yuan as it’s better known, hit a six-year high against other currencies, which could punish exporters at a time when costs are already soaring.
 
Some analysts suggest that the PBoC will target easing towards small businesses, which have been most badly hit by the marked slowdown in economic growth and soaring production costs.
 
Economists are divided though on whether the PBoC would slash rates, with some suggesting the status quo and others taking a view that reserve requirement ratios at banks would come down.
 
Policymakers appear prepared to address the prospect of “quasi-stagflation” a period marked by slow growth and high inflation, which the PBoC will pay close attention to, should it surface.
 
Part of the struggle is that as much as 70% of China’s economy consists of the real estate sector which contributes 29% to GDP and as a painful deleveraging occurs across the industry, has seen growth slow tremendously.
 
The PBoC reiterated that it will not use the property market to stimulate growth, but will instead work with local governments to maintain the “stable and healthy development” of the market and protect consumer rights, which suggests that there will be no messy implosion of real estate developers like the embattled and heavily indebted China Evergrande Group.
 
Besides unfinished projects, China Evergrande Group sold billions of dollars’ worth of investment products tied to the success of the real estate sector and is now sitting on US$305 billion in liabilities.
 

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

 

 

 

3. Cryptocurrencies Are Exerting Pressure on Traditional Markets 24/7

 
  • There is growing pressure on Wall Street to emulate at least some of the characteristics of crypto trading and one of them is opening hours.
  • The 24/7 nature of cryptocurrency markets could also be a function of their volatility, which demand the ability to exit and enter positions immediately.
 
While there remains a healthy skepticism in traditional financial circles when it comes to cryptocurrencies, one area where the digital realm is putting pressure on Wall Street is in terms of operating hours.
 
Because the cryptocurrency markets never sleep, that 24/7 availability is pushing traders of traditional assets to work longer hours, in a reversal of a pre-pandemic campaign by banks and fund managers to shorten opening house at exchanges.
 
With some pension funds following family offices and hedge funds into the risky realm of cryptocurrencies and even Bank of America acknowledging that the sector was not too big to ignore, there is growing pressure on Wall Street to emulate at least some of the characteristics of crypto trading and one of them is opening hours.
 
In early October, Bermuda-registered cryptocurrency and currency trading platform 24 Exchange filed an application with the U.S. Securities and Exchange Commission for al license to run a national securities exchange, in a bid to become the first forum where securities can be traded 365 days a year.
 
Part of the pressure also comes from retail traders, in the wake of the pandemic where lockdowns saw many become day traders who reverted to crypto trading when traditional markets were closed.
 
In an increasingly digital world and 2-hour delivery times, the expectation of instant gratification is putting pressure on traditional bourses to keep their doors open 24/7.
 
Although cryptocurrencies are available for trading any time during the day, stock exchanges only allow trading during set hours five days a week and currency trading pauses for the weekend, in a nod to the human element in finance.
 
And while longer hours are unlikely to be welcome by professional traders who say that the existing regime is already punishing, it could provide opportunities for quant traders who use algorithms and computer programs to trade the markets with limited human intervention.
 
Many cryptocurrency traders already rely on sophisticated algorithms and bots to trade intraday volatility or based on observable flow patterns, to ensure that they can step away from their terminals.
 
But automated trading is not yet the norm in the cryptocurrency markets, with digital asset custodian Copper reporting that the majority of cryptocurrency trading still happens during the week in market hours, with just 35% of transactions taking place on the weekends and outside normal office hours.
 
The 24/7 nature of cryptocurrency markets could also be a function of their volatility, which demand the ability to exit and enter positions immediately.
 
By contrast, currency and equity markets are much sleepier on the whole and except for extraordinary circumstances, few events would trigger the sort of price moves that have become common for cryptocurrencies.
 
Nonetheless, as cryptocurrencies mature, volatility may decrease as well, but the markets will remain open for traders to ply their business in and it’s perhaps just a matter of time before other bourses take their cue from the digital asset industry.
 
 

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 22, 2021

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