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Novum Alpha - Daily Analysis 24 November 2021 (10-Minute Read)

A wonderful Wednesday to you as stocks wind their way back towards cyclicals as tech starts to taper off gains.

 

In brief (TL:DR)

 
  • U.S. stocks treaded water on Tuesday with the Dow Jones Industrial Average (+0.55%) and S&P 500 (+0.17%) higher, while the tech-centric Nasdaq Composite (-0.50%) were down as tech was weaker. 
  • Asian stocks were steady Wednesday as traders weighed the risk of tighter monetary policy to curb inflation and awaited U.S. data as well as Federal Reserve minutes from the last meeting.
  • Benchmark U.S. 10-year Treasury yields held a climb at 1.66% (yields rise when bond prices fall) with expectations of an accelerated taper of asset purchases by the Fed. 
  • The dollar was around the highest since September 2020.
  • Oil pared a rally sparked by a smaller-than-expected move from consumer nations to tap strategic reserves with January 2022 contracts for WTI Crude Oil (Nymex) (+0.47%) at US$78.87.
  • Gold is being pressured by higher yields with February 2022 contracts for Gold (Comex) (+0.57%) at US$1,796.40.
  • Bitcoin (+0.33%) rose to US$57,124, on inflation concerns with oil prices contributing to price increases. 
 

In today's issue...

 
  1. JD.com Gains on Alibaba’s Woes
  2. Oil Spikes Despite Release of Strategic Reserves
  3. A New Crypto Sheriff is in Town – U.S. Banking Regulators
 

Market Overview

 
Damping inflation is now center-stage for policy makers, posing a test for markets as ultra-loose, pandemic-era monetary stimulus is scaled back.
 
The deluge of U.S. data and the Fed minutes will give investors a read on price pressures and the economic recovery.
 
The prospect of the Fed speeding up the withdrawal of monetary stimulus has tempered bond market inflation expectations, though they remain elevated.
 
In Asia, markets were stable Wednesday with Hong Kong's Hang Seng (-0.06%), Seoul's Kospi Index (-0.44%) and Tokyo's Nikkei 225 (-1.48%) down, while Sydney’s ASX 200 (+0.02%) was slightly up in the morning trading session. 
 
 

1. JD.com Gains on Alibaba's Woes

 
  • Analysts see Alibaba’s challenges as going beyond the economic cycle, whereas JD.com is offering more clarity in terms of long-term improvement on margins.
  • Hong Kong shares of Alibaba are down over 18% this month alone, more than wiping out all of October’s gains while JD.com has recovered some 46% from its low in August.
 
The gap between Chinese e-commerce juggernauts JD.com (-1.24%) and Alibaba Group Holdings (-1.43%) is widening.
 
Whereas Chinese tech stocks for the most part had sunk more or less across the board in the aftermath of ride-hailing app Didi Global’s (-0.12%) abysmal public offering in New York in the wake of the crackdown by Beijing on tech firms and their data usage, some have fared better than others since.
 
Alibaba Group Holdings got off relatively lightly all things being considered, with a fine for antitrust issues, as opposed to a messy break up, but its October rally has since given way to a renewed slump that has seen stock of the company head towards a record low, while archrival JD.com is extending its recovery and winning plaudits from analysts.
 
Part of the reason is that analysts see Alibaba’s challenges as going beyond the economic cycle, whereas JD.com is offering more clarity in terms of long-term improvement on margins.
 
Hong Kong shares of Alibaba are down over 18% this month alone, more than wiping out all of October’s gains while JD.com has recovered some 46% from its low in August.
 
Beijing’s crackdown on Alibaba specifically means that the e-commerce giant will need to shift about 5% of its revenue to competitors, including JD.com and Pinduoduo (-0.31%).
 
Making matters worse, Alibaba cut its fiscal 2022 outlook on intensifying competition and dwindling consumer spending in China.
 
Sales at Alibaba missed analyst estimates for a second straight quarter, with revenue posting a less-than-expected 29% rise for the September quarter.
 
With fewer customers, Alibaba rivals JD.com and Pinduoduo are ramping up investments such as special offers and incentives to win over Alibaba’s users, just as a resurgence in Covid-19 cases dampens consumer spending.
 
JD.com has managed to attract new and returning brands like Starbucks and Estee Launder to its platforms, taking advantage of Beijing’s edict to end exclusivity arrangements previously imposed on merchants, and all but guaranteeing Alibaba’s fat profits.
 
Where Alibaba could shine though is from its cloud division, the second-largest revenue contributor, which remained a bright spot for an otherwise lackluster quarter, with the firm unveiling in October a new server chip built with 5-nanometer tech, the most advanced in the country.
 
Sales at cloud grew by a third during the quarter, rebounding after losing a major customer which some suggest was ByteDance’s TikTok last quarter.
 
Alibaba sales for the much anticipated Singles’ Day, the year’s biggest shopping festival reached a fresh record of US$84.5 billion this month, but the 8.5% increase was a sharp slowdown from previous years, and may be emblematic of generally slowing consumer consumption.
 
 

2. Oil Spikes Despite Release of Strategic Reserves

 
  • In an attempt to reign in the runaway price of oil, Biden has released some 50 million barrels from the country’s strategic stockpile – or around 2.5 days’ worth of oil consumption, over the coming months, in a move coordinated with China, India, Japan, South Korea and the U.K.
  • That move was rewarded with a spike of almost 3.3% in the international benchmark Brent Crude price, which rose to US$82.31 on the news.
     
Embattled U.S. President Joe Biden just can’t catch a break.
 
With approval ratings at 41%, according to the latest survey by The Washington Post and ABC News, Biden is just barely ahead of predecessor Trump’s 38.1% approval rating at this stage in his presidency and the worst poll numbers compared to every other president except for Trump.
 
These are not good statistics as Americans gripe that Biden has been unable to unite the country and is not leading it in the right direction.
 
In an attempt to reign in the runaway price of oil, Biden has released some 50 million barrels from the country’s strategic stockpile – or around 2.5 days’ worth of oil consumption, over the coming months, in a move coordinated with China, India, Japan, South Korea and the U.K.
 
That move was rewarded with a spike of almost 3.3% in the international benchmark Brent Crude price, which rose to US$82.31 on the news.
 
Traders are betting that the 50 million barrels are a drop in the ocean, barely moving the needle as Saudi Arabia, Russia and other members of the Opec+ group of oil exporters continue to limit supply to cover back losses during the pandemic and to refill expended coffers.
 
Despite being the largest release of crude oil from the U.S. Strategic Petroleum Reserve, even surpassing the barrels distributed when the civil war in Libya saw crude prices skyrocket in 2011, traders are betting that the amount is insufficient to quell demand and that suppliers will hunker down to drive prices higher.
 
If nothing else, analysts are of the view that Biden may have overplayed his hand, releasing reserves which are barely likely to put a dent in consumption, while whittling away at an emergency resource that will need to be replenished at some point.
 
Biden is under increasing pressure to tame gasoline prices which are up 60% in the past 12 months.
 
Coupled with higher inflation, with CPI data from the Bureau of Labor Statistics pushing above 5% for six consecutive months, dissatisfaction at Biden’s leadership is mounting, even as the U.S. hurtles into midterm elections next year.
 
The problem is complex and can’t be painted with a broad brush.
 
Although fracking costs have come down, there is little incentive for oil companies in the U.S. to extract more using the method as they sit on tremendous profits with their current output.
 
Environmental concerns has also seen the Biden administration slower to grant fracking permits and climate change pledges to reduce reliance on fossil fuels is in conflict with more immediate needs to bring down energy costs.
 
Base on the current trajectory, oil could even blow past US$100 at this rate.  
 

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

 

 

 

3. A New Crypto Sheriff is in Town - U.S. Banking Regulators

 
  • On Tuesday, U.S. banking regulators issued a to-do list of their priorities for next year and announced a fresh policy that would require banks to seek permission before offering digital currency products.
  • Politics may ultimately trump any practical inroads to regulate cryptocurrencies in the banking sector as it continues to grow and become more ungovernable by the day.
 
U.S. banking regulators are taking the point when it’s come to plans to oversee the otherwise unruly Wild West that is cryptocurrencies.
 
On Tuesday, U.S. banking regulators issued a to-do list of their priorities for next year and announced a fresh policy that would require banks to seek permission before offering digital currency products.
 
In a joint statement, the U.S. Federal Reserve and other banking watchdogs included plans to weigh custody, cryptocurrency-backed loans and the possibility of capital standards.
 
On top of that the U.S. Office of the Comptroller of the Currency said that banks must get an additional sign-off from the regulator before engaging with cryptocurrencies.
 
In a statement, the OCC and the Federal Deposit Insurance Corp said,
 
“Throughout 2022, the agencies plan to provide greater clarity on whether certain activities related to crypto-assets conducted by banking organizations are legally permissible.”
 
The statements do not affect any current regulations, but provide a roadmap and greater clarity over how federal regulators ultimately want to regulate the way banks interact with cryptocurrencies.
 
Termed a “crypto-asset road map” the move by banking regulators overlaps moves made in 2020 through clarification letters that opened up the possibility for banks to accept deposits that would back stablecoin issuances, through then Acting Comptroller Brian Brooks.
 
The road map laid out by banking regulators is part of what was termed a “crypto sprint” to study how various agencies were approaching cryptocurrencies and settling on the areas which required clarification, including how banks should properly maintain custody of such assets, what firms can do to help customers make transactions and how stablecoins should be issued and what capital and liquidity standards should be for lenders.
 
With the 2022 road map for cryptocurrencies now laid out, the OCC and other agencies could soon be weighing new rules for regulating certain cryptocurrencies similar to banking assets.
 
For starters, the President’s Working Group on Financial Markets wants Congress to take up legislation that would require stablecoins only be issued by regulated banks, a move that is aimed clearly at the controversial Tether.
 
With a market cap of some US$69 billion, Tether is increasingly posing systemic risks not just to the cryptocurrency ecosystem, but the financial system as well, with uncertainty surrounding the veracity of its backed stablecoin issuance with real dollars.
 
But Washington is infamous for regulatory turf wars and its unclear whether the U.S. Federal Reserve, the OCC and the FDIC will come to any sort of agreement in the near term over who should govern what and how.
 
The OCC has yet to appoint a permanent leader, while the Biden administration has yet to nominate a vice chairman to run the Fed’s supervision work, even as the FDIC is still being run by a Trump-era appointee.
 
Politics may ultimately trump any practical inroads to regulate cryptocurrencies in the banking sector as it continues to grow and become more ungovernable by the day.
 
 

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 24, 2021

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