Novum Alpha - Daily Analysis 26 November 2021 (10-Minute Read)
Stocks, Treasury yields and oil fell Friday as a new coronavirus strain sent a wave of caution across global markets.
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A fantastic Friday to you as stocks drop and bonds jump on fears over a new coronavirus strain.
In brief (TL:DR)
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In today's issue...
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Market OverviewStocks, Treasury yields and oil fell Friday as a new coronavirus strain sent a wave of caution across global markets.
The detection of the strain comes on top of concerns in markets about high inflation and the prospect of quicker exit from ultra-loose monetary settings.
Global shares have climbed about 16% this year, weathering a plethora of risks after investors poured almost $900 billion into equity exchange-traded and long-only funds in 2021 -- topping the combined total from the past 19 years.
In China, regulators have asked Didi Global Inc.’s top executives to devise a plan to delist from U.S. bourses, people familiar with the matter said. That may revive fears about Beijing’s intentions for its giant technology industry.
In Asia, markets were fell Friday with Tokyo's Nikkei 225 (-2.65%), Hong Kong's Hang Seng (-2.31%), Seoul's Kospi Index (-1.49%) and Sydney’s ASX 200 (-1.73%) were all down in the morning trading session.
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1. New Day, New Variant, New Volatility
With healthcare professionals discovering a new coronavirus variant in South Africa, global investors have been flocking to haven assets.
U.S. Treasuries and the Japanese yen soared while South Africa saw its rand plummet to the lowest level in a year against the dollar amid fears that the variant may spread globally and undermine the economic recovery.
With American markets shut for the Thanksgiving holiday, liquidity across other markets was thin, even as the jury remains out on whether the new Covid-19 variant is more transmissible, lethal or even resistant to vaccines.
As a precaution, the United Kingdom and Israel have already banned flights from South Africa and five neighboring countries even as Hong Kong confirmed tow cases of the new strain in travelers arriving in the city, which has otherwise maintained strong border controls.
On the one hand, government and healthcare officials already have an established playbook with which to deal with fresh coronavirus variants, as amply demonstrated by the response to the virulent Delta strain, but on the flipside, many current economic forecasts are based on the efficacy of vaccines.
So far, preliminary studies suggest that the South African variant appears to be more virulent, but no one yet knows if it is resistant to vaccines.
In a statement, the World Health Organization noted that the South African variant had “a number of worrying mutations in the spike protein.”
The true fallout of the South African variant will only be apparent in the markets next week, when American markets reopen after the Thanksgiving holiday as volumes remain relatively muted at the moment.
Nonetheless, cyclical stocks and those most closely associated with the economic recovery are likely to see a pullback in the interim, until there is greater clarity on the impact of the South African variant.
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2. Supply Chain Issues Could Get Worse because of China
With a zero tolerance Covid-19 policy, Beijing may be standing in the way of a full recovery of the shipping industry and prolonging a supply chain crisis that has been blamed for causing everything from inflation to empty shelves.
In its attempt to keep the coronavirus out of the country, China has erected the Great Wall of Isolation and continues to prohibit crew changes for foreign seafarers, while imposing a mandatory quarantine for Chinese crew for as long as 7-weeks.
Even ships which have refreshed their crew elsewhere have to lay up to two weeks before they’re allowed to port in China.
Ahead of the peak shopping season, shipowners and managers have been forced to reroute ships, delay shipments and crew chains and added to already snarled supply chains.
As the world’s biggest exporter, China is a key hub for the shipping industry but also the last country that has stuck with a stringent zero-tolerance policy for Covid-19, implementing what often appear to be exceedingly drastic measures.
Last month, authorities locked up 34,000 people at Shanghai Disneyland for mandatory testing following the discovery of a single Covid-19 case and bringing new meaning to the “happiest place on earth.”
Making matters worse, the tightening pandemic restrictions in China are coming at a time when a forced shift away from fossil fuels such as coal is leading to a spike in energy prices and a shortage of electricity.
Brown outs, which most Chinese factories had assumed were a thing of the past, are growing more frequent and manufacturers are having to contend with intermittent power outages even as they run their factories at lowered capacities.
The supply chain snarls are also not uniform.
In the U.S. supply shortages are showing signs of easing, but in the United Kingdom, empty shelves have become the norm.
While some key ports in Asia are getting less congested, in Californian ports, loaded vessels are languishing due to a labor shortage to offload cargo.
China’s latest measures to ensure that its Great Wall of Isolation remains resilient against the coronavirus has been to require its local ship crew to quarantine for three weeks before their return to China, then another two weeks at the port of arrival, and a further two weeks in their province before they can reunite with their families.
The shipping industry has largely absorbed the extra costs of doing business in China, thanks in large part to some of the highest container rates on record due to demand, capacity constraints and port congestion.
But those rates are translating to increased shipping costs which almost inevitably result in higher final prices for consumers and heightened inflationary pressures.
The result of which increases pressure on central banks to do more to reign in inflation, especially when it is likely to persist.
A recent Oxford Economics survey of 148 businesses revealed that nearly 80% of respondents expect the supply chain crisis to have scope to worsen before it gets any better.
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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. Kazakhstan's Grid Buckles from Cryptocurrency Mining
When Beijing cracked down on cryptocurrency mining within its borders, one of the first beneficiaries of the purge was neighboring Central Asian Republic Kazakhstan.
With the largest proven oil reserves in the Caspian Sea region and a government in Astana that is relatively open to cryptocurrencies, the country saw a steady stream of cryptocurrency miners relocating from China to within its borders.
But Kazakhstan, made famous by the character “Borat” played by Sacha Baren Cohen, has been struggling to cope with the huge influx of cryptocurrency miners.
Three major Kazakh power plants in the north went into emergency shutdown last month as the state grid operator Kegoc warned that it would start rationing power to the fifty or so cryptocurrency miners registered with the government.
Pressure on Kazakhstan’s already overtaxed power grid by cryptocurrency mining has already caused rolling blackouts across towns and villages in six regions in the country since October, when China ramped up its crackdown on its own mining industry.
The availability of cheap electricity in Kazakhstan has also seen some of the more antiquated cryptocurrency mining machines that are more energy-hungry, being used.
Kazakhstan’s Ministry of Energy estimates that demand for electricity has increased around 8% since the start of this year, well up from an annual growth rate of 2% in previous years.
The problem is being compounded by miners literally stealing electricity.
For years, Chinese cryptocurrency miners had stolen electricity directly from the grid while complicit local and provincial officials looked the other way for a piece of the action.
In Kazakhstan, the Ministry of Energy estimates that so-called “grey miners” who operate illegally are siphoning off some 1,200 MW of electricity from the power grid, or twice as much as registered “white miners.”
Mining cryptocurrencies is not banned in Kazakhstan, but miners need to have government permits, adhere to safety standards and from 2022 pay a surcharge for power.
While the surcharge may seem as if it would drive even more miners underground, in reality, inexplicably high levels of energy consumption which did not attract such a surcharge would automatically be flagged by authorities and illegal mining facilities shut down.
Making matters worse, as temperatures drop, demand for energy for heating is likely to increase as well and Kazakhstan has already approached neighboring Russia for assistance.
Although Kazakhstan has an abundance of energy resources, and low electricity rates drew in cryptocurrency miners from all over the world, the rates also glossed over systemic issues with creaky infrastructure that the Central Asian Republic has long suffered from.
A lack of investment in renewal and maintenance has stymied efforts to carry power from the coal-rich north of Kazakhstan to the south, where demand is greatest.
Power generation plants are antiquated an inefficient and power lines badly in need of renewal and repair.
Nonetheless, Astana remains committed to fostering cryptocurrency mining and innovation in the space, as it looks for revenue sources outside of energy.
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Nov 26, 2021