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Novum Alpha - Daily Analysis 1 December 2021 (10-Minute Read)

Powell’s pivot came on top of worries about growth threats from the omicron virus strain amid a rift among drugmakers over the efficacy of current vaccines.

 
A wonderful Wednesday to you as traders weigh Powell’s pivot.
 

In brief (TL:DR)

 
  • U.S. stocks slumped Tuesday with the Dow Jones Industrial Average (-1.86%), the S&P 500 (-1.90%) and the Nasdaq Composite (-1.55%) all ending in the red. 
  • Asian stocks were mixed Wednesday as traders weighed Federal Reserve Chair Jerome Powell’s signal of tighter monetary policy ahead to tackle economic risks from elevated inflation.
  • Benchmark U.S. 10-year Treasury yields rose four basis points to 1.49% (yields rise when bond prices fall) as traders take in more information regarding the new pandemic variant. 
  • The dollar ticked up. 
  • Oil pared a tumble with January 2022 contracts for WTI Crude Oil (Nymex) (+1.98%) at US$67.49 but well off the highs.  
  • Gold held a drop with February 2022 contracts for Gold (Comex) (+0.05%) at US$1,777.30.
  • Bitcoin (-0.13%) retreated to US$57,234 but with sentiment still strong on expectations that inflation will trend higher which feeds well into the benchmark cryptocurrency's inflation hedge narrative. 

 

In today's issue...

 
  1. U.S. Federal Reserve Unmoved by Omicron Variant
  2. Pension Funds are Looking For Yield Everywhere
  3. Ether No Longer the Bridesmaid
 

Market Overview

 
Powell said the next Fed meeting should discuss whether to wrap up bond purchases a few months earlier and retired the word “transitory” to describe high inflation. That could open the door to earlier interest-rate hikes.
 
Powell’s pivot came on top of worries about growth threats from the omicron virus strain amid a rift among drugmakers over the efficacy of current vaccines.
 
Diminishing monetary policy support and the still-uncertain risks for global reopening from the virus variant have sent pulses of volatility across markets.
 
In Asia, markets were mixed Wednesday with Tokyo's Nikkei 225 (+0.41%), Hong Kong's Hang Seng (+0.85%) and Seoul's Kospi Index (+2.14%) up, while Sydney’s ASX 200 (-0.28%) was down. 
 
 

1. U.S. Federal Reserve Unmoved by Omicron Variant

 
  • U.S. Federal Reserve Chairman Jerome Powell has said previously that the Fed will not raise rates so long as asset purchases remain in place.
  • Accelerating the taper will see asset purchases end even earlier and pave the way for an interest rate hike.
 
Despite concerns that the omicron variant of the coronavirus could derail the economic recovery, the U.S. Federal Reserve has signaled its support for a quicker withdrawal of the central bank’s massive asset purchase program that raise the specter of earlier interest rate hikes next year.
 
U.S. Federal Reserve Chairman Jerome Powell who will likely be confirmed by the Senate for another 4-year term has said previously that the Fed will not raise rates so long as asset purchases remain in place.
 
Testimony by the Fed chair at a congressional hearing that the Fed would taper earlier than expected roiled markets already shaken by Moderna CEO predicting that existing vaccines would be less effective against the omicron variant.
 
The Fed started scaling back its US$120-billion-a-month several weeks ago by US$15 billion, or around 12.5%, which at a linear pace, will see the central bank stop buying bonds by June of next year.
 
Accelerating the taper will see asset purchases end even earlier and pave the way for an interest rate hike.
 
Comments by Powell sent the benchmark S&P 500 plummeting by 1.9% and the tech heavy Nasdaq Composite down 1.6% while two-year Treasury notes, the most sensitive to monetary policy adjustments sold off sharply, with yields soaring from 0.07% to 0.56% (yields rise when bond prices fall).
 
The simultaneous fall in both bonds as well as equities has provided a challenging investment environment yet again for investors who have stuck with a traditional 60/40 mix of stocks and bonds and added to portfolio volatility.
 
Traders who had earlier bet that the Fed would hold off on tapering and rate increases because of the omicron variant were caught flatfooted and had to quickly adjust bets for the coming months, a dramatic U-turn that saw federal funds futures rallying with markets pricing in just over two 0.25% rate rises by the end of next year.
 
 

2. Pension Funds are Looking For Yield Everywhere

 
  • A recent report by Amundi has revealed the extent to which managers are going to hunt for returns against a backdrop of historically low bond yields and elevated equity valuations.
  • While pension fund managers may have the first pick for choice assets, what this means for investors looking to plan their own pension portfolios is the inevitable assumption of more risk.
     
Just as pension funds are having to contend with the prospect of meeting their biggest obligations in decades as Baby Boomers look forward to their retirement, a confluence of market conditions is conspiring to make the job of their managers that much harder.
 
A recent report by Amundi, Europe’s largest asset manager, and Create Research, which surveyed 152 defined benefit plans managing some US$2.38 trillion in assets has revealed the extent to which managers are going to hunt for returns against a backdrop of historically low bond yields and elevated equity valuations.
 
Although funds were buoyed in the aftermath of the 2008 Financial Crisis, helped in large part by the relentless rally in equities that helped make up for the paltry bond yields, those Halcyon days may now be over as managers face the prospect of tighter monetary policy.
 
Making matters worse for pension fund managers is the confluence of ageing demographics, an immediate need for cashflow to pay members and low interest rates.
 
Defined benefit pension plans provide a guaranteed retirement income that rises along with inflation and managers have typically been steered to hold bonds which follow such liability flows.
 
But the low-yield environment has meant that highly rated assets with yields that cover inflation are in short supply and forced managers to look at other assets, including private equity, private debt, real estate, infrastructure, venture capital, hedge funds and even cryptocurrencies.
 
Date provider Preqin estimates the amount of private assets held by pension funds will increase by 60% from 2020 to 2025 to surpass US$17 trillion under management.
 
And while pension fund managers may have the first pick for choice assets, what this means for investors looking to plan their own pension portfolios is the inevitable assumption of more risk.
 

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

 

 

 

3. Ether No Longer the Bridesmaid

 
  • Ether has outperformed bitcoin since the former was launched in 2015.
  • Ether appears to be making a push towards fresh record highs and bounced off its 50-day moving average, a sign of a bullish rebound. 
 
In what has been a challenging month for cryptocurrencies, the world’s second largest by market cap, ether, has outperformed bitcoin since the former was launched in 2015.
 
Despite being down from record highs set earlier this month, ether, which powers smart contracts, has gained around 530% since last December, compared with a “mere” doubling in value for bitcoin over the same period.
 
Overall ether has outperformed bitcoin by around 400%, despite the latter having double the market cap, according to data from CoinMarketCap.com
 
Ether’s seemingly relentless ascent is not altogether unexpected.
 
Ever since the London hard fork, ether has been moving towards a more deflationary cryptocurrency, akin to bitcoin, and has many highly-anticipated network upgrades due next year, including a potential move to a proof-of-stake mechanism to secure the Ethereum blockchain that would help put to rest allegations of the energy-wasting mining of cryptocurrencies.
 
Ether also has seen strong demand for a wide range of applications, from decentralized finance or DeFi, to non-fungible tokens or NFTs.
 
Part of the reason for ether’s strong growth has also been the greater interest in cryptocurrencies over the course of the pandemic, and it is natural that investors would want to look beyond bitcoin once they’ve entered the space.
 
Larger trading volumes and its use in the futures market for powering bitcoin ETFs in the U.S. may have also helped to moderate the pace of growth in bitcoin relative to ether as well.
 
With more institutions trading bitcoin via ETFs or other institutional-grade instruments, growth and expectations can be expected to be more moderate.
 
Ether appears to be making a push towards fresh record highs and bounced off its 50-day moving average, a sign of a bullish rebound. 
 
 

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.  

Dec 01, 2021

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