A wonderful Thanksgiving (where available) weekend to you as markets take a turn for the worse on diminished volumes and a brand new coronavirus variant.
In brief (TL:DR)
- U.S. stocks tumbled hard in an abbreviated turkey shoot of a session on Friday with equities dumped against slim volumes seeing the Dow Jones Industrial Average (-2.53%), the S&P 500 (-2.27%) and the Nasdaq Composite (-2.23%) all sharply lower.
- Asian stocks were hammered on Friday as investors dumped all manner of risk assets thanks to a brand new coronavirus variant that threatens to derail the recovery.
- Benchmark U.S. 10-year Treasury yields plummeted to 1.479% as investors sought safety in bonds (yields fall when bond prices rise).
- The dollar soared to its highest levels since the beginning of the pandemic.
- Oil fell sharply with January 2022 contracts for WTI Crude Oil (Nymex) (-13.06%) at US$68.15, the sharpest fall since the beginning of the pandemic on concerns that the Omicron variant will see countries close off borders again and reintroduce travel restrictions.
- Gold was flat with February 2022 contracts for Gold (Comex) (+0.07%) at US$1,788.10.
- Bitcoin (-6.35%) receded into the weekend alongside other risk assets to US$54,917 on Saturday night in Asia with signs of bottoming out and the outside chance of a rebound come Monday's U.S. trading.
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In today's issue...
- Could Asia be immune to inflation?
- China Evergrande Group's Founder Sells Shares to Shore Up Company
- Bitcoin is Not the Haven Asset That You Seek
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Market Overview
Black Friday turned out to be a fire sale on all manner of assets except those considered the very safest.
U.S. equities slid in a selloff across global markets amid growing fears a new coronavirus variant termed Omicron, identified in South Africa, could potentially spark fresh outbreaks, sever newly reopened vaccinated travel lanes and scuttle a fragile economic recovery.
Gold maintained ground while U.S. Treasury yields plunged to their lowest since March 2020 when the pandemic was first hitting markets.
In the worst post-Thanksgiving slump for the S&P 500 since 1941, while the Japanese yen soared.
In Asia, markets were eviscerated with Tokyo's Nikkei 225 (-2.53%), Hong Kong's Hang Seng (-2.67%), Seoul's Kospi Index (-1.47%) and Sydney’s ASX 200 (-1.73%) all a sea of red headed into the weekend.
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1. Could Asia be immune to inflation?
Shelves on the British Isles carry cardboard images of goods that would otherwise have adorned them and in the U.S., headline inflation has been well over 5% for the past six months, the highest in over three decades.
Yet in Asia, concerns over inflation have been relatively sanguine.
In China, CPI is up just 1.5% compared with a year ago, while in Japan, inflation is more or less where it’s been for decades, zero.
While it’s true that Asia which depends on the rest of the world for energy, has suffered the same rise in prices for oil, gas and coal, as well as other commodities including metals, food and materials, inflation has just not been as bad as everywhere else.
Part of the reason of course is that Asia, which suffered the brunt of the SARS pandemic fared relatively better than the western hemisphere when it came to the pandemic.
While most of Western Europe and North America was hunkered down by the pandemic, compliant mask-wearing populations in Asia lived relatively freely and avoided most of the pent-up demand that has become the narrative in countries where long lock-downs are only being lifted just now.
On the demand side of the economy, Asia managed to avoid the bulk of the dramatic swings in consumption from services to goods compared with the U.S. and Europe.
Demographics have also played a key role.
Take for instance Japan, where elderly households account for as much as 40% of consumption and while the bulk are now largely vaccinated, their consumption of services has not yet return to normal, let alone seen a post-pandemic boon.
And smaller swings in demand has resulted in less pressure for supply to respond as well as highlighted how much manufacturing sits in Asia.
Factories from Hangzhou to Ho Chih Minh have been churning out goods for the rest of the globe and since the region makes most of the world’s stuff, it can more easily keep itself well supplied.
And while the cost of shipping a container from China to Europe may have at times gone up by a factor of five, they’ve barely doubled within Asia.
Not being able to meet suppliers has also been an issue thanks to strict travel restrictions.
Whereas an Asian manufacturer could just go down the road to source another supplier as factories slowed down because of the pandemic, much of the rest of the world was locked out of the region tanks to travel restrictions.
Zoom calls may be possible for other industries, but factory site inspections and quality control are a whole different ballgame.
Btu as inflation rises in the West, there is growing pressure on central banks to raise interest rates, and this may have some unintended consequences.
As the cost of borrowing remains low in Asia, a simple carry trade of borrowing in Asian currencies and lending in the euro or dollar may emerge.
Investment may also start to flow out of the U.S. and Europe, into Asia, particularly in emerging manufacturing hubs like the Philippines and Vietnam, which stand the most to gain as China endures painful structural shifts.
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2. China Evergrande Group's Founder Sells Shares to Shore Up Company
“This bond doth give thee here no jot of blood. The words expressly are “a pound of flesh. Take then thy bond, take thou thy pound of flesh, but in the cutting it if thou dost shed one drop of Christian blood, thy lands and goods are by the laws of Venice confiscate unto the state of Venice.”
– William Shakespeare’s The Merchant of Venice, Act 4, Scene 1, Lines 295-303
For a founder of any company, to give up a stake in their firm can often feel like giving up a pound of flesh, but the returns are typically sufficient to draw no blood.
Not so in the case of embattled Chinese developer China Evergrande Group, whose founder Hui Ka Yan has offloaded his stake in the company he founded for the first time since it went public in 2009, demonstrating his determination to save his crumbling empire.
In Chinese culture, selling one’s stake is akin to carving off a piece of flesh from one’s body, but with no white knight in sight and everything to lose, Hui sold 1.2 billion Evergrande shares last Thursday for around US$344 million, according to a filing with the Hong Kon Stock Exchange.
Hui has long held on to every share he could hold on to at the Chinese real estate developer that he build literally from the ground up, with his stake of the company at 76.96% before Thursday’s sale.
Beijing has been urging Hui for sometime to use his own wealth to help shore up the finances of his indebted property empire, with over US$305 billion in liabilities.
On his part, Hui has injected over US$1 billion into Evergrande since July, mainly through the disposal of personal assets and pledging shares.
Hui’s disposal of shares last Thursday though will draw some blood, with the sale price at a bout a 20% discount to the closing price the day before.
So far this year, China Evergrande Group’s shares have fallen by a whopping 83% and analysts suggest there is more to bleed.
Despite several 11th hour payments on dollar-denominated debt in recent weeks, China Evergrande Group’s bonds are trading at deep discounts to par value as investors brace for what could eventually become one of China’s largest ever restructurings.
Dollar notes due on March 2022 are trading at around US$0.33 on the dollar as of Friday, but it would be a plucky investor who would take a bet on China Evergrande Group at those levels.
The assumption is that at some stage Beijing will step in and declare that the “test” is over and adult supervision is coming in.
But even at these levels, there’s still room to fall further.
The main problem is that because so much of China Evergrande Group’s assets are tied to the Chinese real estate market, it would take significant policy shifts from Beijing to turn things around.
Sharks are already circling around Evergrande’s more valuable assets, from bottled water to electric vehicles and internet businesses and at some stage, what is left behind will attract distressed valuations.
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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. Bitcoin is Not the Haven Asset That You Seek
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Bitcoin and cryptocurrencies slide alongside other risk assets
- Bitcoin correlation with other risk assets at its highest level in a year, too early to write off cryptocurrencies altogether given that market correction has been broad-based across risk assets
Fresh coronavirus concerns is leading to a broad decline across all risk assets and cryptocurrencies, led primarily by bitcoin are no exception.
Despite narratives which have pitched bitcoin as being a hedge for everything from inflation to uncertainty, the cryptocurrency has not been spared the latest rout in markets over concern that a new coronavirus variant has surfaced and threatened to derail markets flush with optimism.
Bitcoin has tumbled some 20% from its record high attained earlier this month, as the new Omicron variant has spurred traders to dump everything from equities to commodities.
Perhaps the cryptocurrency would have fared better in a financial crisis?
While the most recent drop has undermined the suggestion that bitcoin is a potential hedge against turmoil in the more traditional risk markets, it must be seen in context as well.
For starters, until greater clarity is had about the Omicron variant, traders will have little appetite or optimism or risk-taking.
And given that Friday was an abbreviated session for markets in general, with the bulk of liquidity from the U.S. dried up because of the Thanksgiving holiday, the large swings at the end of the week are by no means the full extent of matters.
Monday will reveal just how much traders and investors are concerned that the Omicron variant will derail the nascent economic recovery and wind back the global reopening.
Although bitcoin and other risk assets such as stocks don’t always move in lockstep, the correlation between the cryptocurrency and the benchmark S&P 500 is positive and risen to its highest levels of the year.
Eye-watering valuations and repeated records for U.S. equities have also seen some froth spill over into the cryptocurrency markets.
Investors looking to add bitcoin need to recognize that they’re not necessarily dampening portfolio volatility but adding to it.
Nevertheless, a Thanksgiving weekend no less is too short a time to determine bitcoin’s value (if any) whether as an inflation hedge or a haven asset.
The U.S., major central banks and global governments will need to provide a more comprehensive threat assessment of the Omicron coronavirus variant and most importantly, whether existing vaccines are sufficient to provide a reasonable defense of the pandemic recovery.
There are some macro factors to suggest that bitcoin could recover regardless.
If indeed lockdowns are reimposed, bored day traders could pour back into bitcoin again as they did in the earlier part of this year.
Another possibility is that Washington and Brussels could delay any tapering of asset purchases or kick back rate hikes, and excess liquidity would be another excuse for the bitcoin “inflation hedge” bulls.
In other words, the general malaise being experienced now in the markets is just that – fear and uncertainty, but once there is greater clarity, either way could see an uptick in bitcoin prices.
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