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Novum Alpha - Daily Analysis 25 November 2021 (10-Minute Read)

A wonderful Thursday to you as global stocks remain near records even as central banks cut back on monetary accommodation and a Covid surge in Europe saps sentiment.

 

In brief (TL:DR)

 
  • U.S. stocks closed Wednesday with the Dow Jones Industrial Average (-0.03%) down slightly, while the S&P 500 (+0.23%) and the tech-centric Nasdaq Composite (+0.44%) were up.
  • Asian stocks were mixed Thursday as the dollar held near a 16-month high in the wake of Federal Reserve minutes that flagged the risk of a faster reduction in stimulus to fight elevated inflation.
  • Benchmark U.S. 10-year Treasury yields declined three basis points to 1.63% (yields fall when bond prices rise).
  • The dollar held near a 16-month high.
  • Oil was steady with January 2022 contracts for WTI Crude Oil (Nymex) (-0.09%) at US$78.32 as traders await the response of OPEC+ to a coordinated release of strategic reserves by consuming nations.
  • Gold was higher with February 2022 contracts for Gold (Comex) (+0.53%) at US$1,796.40.
  • Bitcoin (+1.21%) rose to US$57,820, on inflation concerns with oil prices contributing to price increases. 
 

In today's issue...

 
  1. JP Morgan’s Jamie Dimon and the US$20 billion Joke
  2. Wall Street is Bugging Out of Bonds Because of Inflation, Should You?
  3. India Attempts to Regulate Cryptocurrencies
 

Market Overview

 
Global stocks remain near records even as central banks cut back on monetary accommodation and a Covid surge in Europe saps sentiment. Assets from equities to commodities and cryptocurrencies have delivered substantial gains this year.
 
Investors are evaluating how much further they can go as the recovery from the pandemic continues but liquidity tailwinds start to cool.
 
The latest U.S. data showed a solid economic recovery, including resilient consumer spending despite persistent price pressures. Fed officials at their last meeting were open to a quicker removal of policy support to curb inflation.
 
In Asia, markets were mixed Thursday with Tokyo's Nikkei 225 (+0.72%) up, while Hong Kong's Hang Seng (-0.25%), Seoul's Kospi Index (-0.39%) and Sydney’s ASX 200 (-0.04%) were all down in the morning trading session. 
 
 

1. JP Morgan's Jamie Dimon and the US$20 billion Joke

 
  • It was with some surprise then that JPMorgan Chase CEO Jamie Dimon, who once famously referred to bitcoin as a “fraud” joked about how his bank would outlast the Chinese Communist Party.
  • So far, it would appear that JPMorgan Chase (-0.77%) may have gotten away relatively unscathed by Dimon’s callous remarks.
 
The Chinese Communist Party may have many things, but one thing it doesn’t have is a sense of humor.
 
Not so long ago, in a Middle Kingdom not so far away, all traces of Winnie the Pooh were scrubbed from Chinese cyberspace thanks to a not-so-flattering comparison of Chinese President Xi Jinping to the honey-loving and rotund cartoon bear.
 
Since then, legions of American actors and businesses have all had to apologize to the Chinese authorities (and people) for numerous faux pas that have covered everything from referring to Hong Kong as a country to depicting a map of China without including Taiwan.
 
So it was with some surprise then that JPMorgan Chase CEO Jamie Dimon, who once famously referred to bitcoin as a “fraud” joked about how his bank would outlast the Chinese Communist Party.
 
Dimon may have meant the comments as a joke, but on the year of the centenary celebration of the Chinese Communist Party and ahead of a twice-a-decade key leadership reshuffle next year, jokes about President Xi’s party will not be well received.
 
JPMorgan Chase has nearly US$20 billion of exposure in China and big ambitions to expand even further, with a lot riding on maintaining cordial relations with Beijing, which is hypersensitive to anything that might be construed as questioning the Chinese Communist Party’s legitimacy and longevity.
 
Considering that JPMorgan Chase was the first foreign bank to receive approval for 100% foreign ownership of its Chinese securities firm, with archrival Goldman Sachs (-1.81%) only the second overseas bank to win the same privilege, investors would have thought the former would tread more daintily around such sensitivities.
 
At a panel discussion held by the Boston College Chief Executives Club, the outspoken Dimon quipped that he could make the comments about the Chinese Communist Party because he wasn’t in China and warned that a Chinese intervention in Taiwan “could be their Vietnam,” referring to the humiliating defeat of U.S. forces by the communists in Vietnam.
 
Yesterday, a Chinese Foreign Ministry spokesperson deflected the question at a regular press briefing,
 
“Is it really necessary to cite such remarks that are merely to attract people’s attention?”
 
So far, it would appear that JPMorgan Chase may have gotten away relatively unscathed by Dimon’s callous remarks, with Chinese state-owned media, typically quick to criticize perceived slights by foreign companies, yet to cover Dimon’s comments, even as they wrote about his other views on everything from cryptocurrencies to U.S. policy risks.
 
But it may be Dimon’s comments on Taiwan that will raise Beijing’s ire, with the Communist Party having a well-documented history of taking action against companies that and individuals that appeared to slight the government or challenge policies, especially on sensitive issues like Taiwan.
 
To be sure, JPMorgan Chase’s exposure to China, at just US$19.7 billion, is tiny, compared to its US$3.8 trillion balance sheet, but Dimon has called China one of the world’s biggest opportunities.
 
And while JPMorgan Chase already has a toehold in the world’s second largest economy, as evidenced by the evisceration of China’s biggest companies like China Evergrande Group and Alibaba Group Holdings, Beijing has no qualms about culling its own firms, let alone a foreign one.
 
But Dimon’s loose lips may provide an opportunity for Goldman Sachs, which also won approval by China’s securities regulators to take 100% ownership of its local securities trading firm.
 
 

2. Wall Street is Bugging Out of Bonds Because of Inflation, Should You?

 
  • CPI data in the U.S. which has seen headline inflation exceed 5% for the six consecutive months and the fastest pace of price increases in over three decades are shaking even the most diamond hands that are clutching on to bonds.
  • Bonds do particularly badly in times of high inflation – a fixed coupon rate puts them at a disadvantage compared to equities, especially companies which have the flexibility to increase prices and pass on price pressures to customers.
     
For the most part, some of the biggest names on Wall Street bought into the U.S. Federal Reserve’s narrative – that inflation was “transitory” and continued to depend on bonds as a shock absorber should equity markets inevitably correct.
 
But CPI data in the U.S. which has seen headline inflation exceed 5% for the six consecutive months and the fastest pace of price increases in over three decades are shaking even the most diamond hands that are clutching on to bonds.
 
While Goldman Sachs strategists suggest that it may be premature to abandon a 60/40 stock and bond portfolio altogether, they do suggest that investors may ultimately need more equities in their coffers to generate positive returns thanks to misfiring bonds.
 
Bonds do particularly badly in times of high inflation – a fixed coupon rate puts them at a disadvantage compared to equities, especially companies which have the flexibility to increase prices and pass on price pressures to customers.
 
Even Pacific Investment Management, the bond-investing giant that earlier this year dismissed concerns over inflation as a “head fake” is expecting price pressures to endure.
 
More of Wall Street’s biggest names are declaring the Goldilocks moment for markets officially over – the 5-year period of steady growth and low interest rates and are adjusting their portfolio mixes accordingly.
 
TIPS or Treasury Inflation-Protected Securities, a U.S. Treasury bond that is indexed to an inflationary gauge to protect investors from the decline in the purchasing power of their money are growing in popularity among the institutional crowd, but are thus far still pricing in reasonable levels of inflation.
 
Others are short emerging market securities, which they believe will suffer as the Fed raises rates that sees the dollar rising.
 
Some managers though are still sold on the Fed’s narrative and betting that inflationary pressures will iron themselves out as soon as supply chain snarls get sorted, while labor will automatically correct once job support programs run dry.
 
Investors are caught in the middle of these opposing schools of thought.
 
On the one hand, loading up on equities which are pushing lofty valuations appears increasingly risky, especially if borrowing costs should suddenly increase overnight.
 
From another perspective, bonds would suffer if inflation increases and central banks continue to sit on their hands.
 
In these circumstances, the middle course would probably be most prudent.
 
Ultimately, an investment portfolio is intended to generate returns in excess of inflation at the very minimum and to grown one’s retirement nest egg, as a long-term goal.
 
In this regard, to focus only on protecting a portfolio against inflation alone would be to miss the point.
 
Which means that investors, more than at any point in time in the past can no longer adopt a “set and forget” approach towards their portfolios and will need to be proactive instead of reactive.
 
Over the long run, investors will need to consider various factors, including their age, earning potential and their risk tolerance.
 
With unprecedented levels of liquidity in the financial system, the negative correlation between bonds and stocks is no longer a given and investors will need to make more astute portfolio allocations than at any time in the past.
 
In these circumstances, investors could do worse than bet on stocks.
 
Corporate America continues to enjoy fat margins that will allow it to both absorb greater costs, and pass on some of those increases to consumers who show a post-pandemic resurgence in demand.
 
Wage growth also works in favor of equities because it will increase consumer buying power.
 
Even if inflation doesn’t persist for as long as forecast, equities still appear to be the lesser of the two evils.
 
When it comes to portfolio allocation, focusing purely on protection against inflation may be to miss the forest for the trees.
 

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

 

 

 

3. India Attempts to Regulate Cryptocurrencies

 
  • New Delhi is once again trying to reign in India’s vibrant cryptocurrency scene with a fresh bill to regulate cryptocurrencies set to be presented before parliament by the end of this month.
  • While New Delhi’s pronouncement may appear somewhat contradictory, it is emblematic of India’s longstanding love-hate relationship with cryptocurrencies.
 
Many Indians have a fractious relationship with the Reserve Bank of India, the Indian central bank.
 
When New Delhi outlawed the 500 and 1000 rupee note, in what was then termed “demonetization,” millions of Indians across the country, flocked to their local bank branches to hand in the soon-to-be worthless notes.
 
But while New Delhi ultimately backed down from demonetization, the raison d'être for the move is still as valid today as it was in 2016 – fighting corruption, fake notes and attempting to create a cashless economy by pushing digital transactions.
 
So it came as no surprise that when cryptocurrencies came about, Indians took to them like fish in water, before the Reserve Bank of India tried repeatedly to outlaw the nascent asset class.
 
Home to some of the largest and most active cryptocurrency exchanges globally, New Delhi is once again trying to reign in India’s vibrant cryptocurrency scene with a fresh bill to regulate cryptocurrencies set to be presented before parliament by the end of this month.
 
The government of Prime Minister Narendra Modi is looking to help the central bank issue its own digital currency, while outlawing all private cryptocurrencies except for the promotion of the underlying technology of cryptocurrency and its uses.
 
While New Delhi’s pronouncement may appear somewhat contradictory, it is emblematic of India’s longstanding love-hate relationship with cryptocurrencies.
 
In 2018, cryptocurrency transactions were effectively banned before the Supreme Court struck down the restrictions in March 2020.
 
But now that more Indians are pushing into cryptocurrencies, helped in no small part by the rapid ascent of bitcoin’s price, there have been growing calls to impose stricter rules in the space to prevent more domestic household savings being diverted into digital assets.
 
Regardless, traders are not sitting around to find out what New Delhi has in store for them next, with an arbitrage opportunity already opening up.
 
Prices of cryptocurrencies in Indian exchanges are already far lower than they are on other global exchanges.
 
At one stage, bitcoin was down over 12% on Indian cryptocurrency exchange Wazirx, while it was just 2% lower offshore.
 
But the arbitrage opportunity is also complex to execute. Getting hold of rupees to buy the bitcoins in India remains a stumbling block and these spreads don’t tend to last indefinitely. 
 
Moving money across national borders is a lot more complex than would seem as well.
 
Nonetheless, Indian traders are cashing out for now, wary of what the Modi government will do next to curb growth in the cryptocurrency space with if left unchecked, could pose a significant challenge to Indians’ already tenuous relationship with its central bank.

Nov 25, 2021

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