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Novum Alpha - Daily Analysis 2 December 2021 (10-Minute Read)

A terrific Thursday to you as markets tank yet again on concerns over Covid-19 and central bank hawkishness.

 

In brief (TL:DR)

 
  • U.S. stocks slumped Wednesday with the Dow Jones Industrial Average (-1.34%), the S&P 500 (-1.18%) and the Nasdaq Composite (-1.83%) all down sharply. 
  • Asian stocks were mixed Thursday after a sharp reversal in U.S. shares on concerns about the omicron virus strain and as U.S. Federal Reserve Chairman Jerome Powell reiterated a pivot toward potentially tapering stimulus more quickly.
  • Benchmark U.S. 10-year Treasury yields rose two basis points to 1.42% (yields rise when bond prices fall).
  • The dollar edged lower.
  • Oil fluctuated with January 2022 contracts for WTI Crude Oil (Nymex) (+1.11%) at US$66.30 as traders await an OPEC+ meeting that will discuss output.
  • Gold was little changed with February 2022 contracts for Gold (Comex) (-0.18%) at US$1,781.00.
  • Bitcoin (-0.54%) fell to US$57,078 along with other risk assets. 
 

In today's issue...

 
  1. Highest Yielding Bonds are Hit Hardest
  2. Omicron Could be Black Friday for Assets
  3. Cryptocurrency Startups are as Hot as the Digital Tokens Themselves
 

Market Overview

 
Investors are braced for volatility in financial markets to continue through December, stirred by tightening central bank policies to fight inflation just as the omicron variant threatens to impede the pandemic recovery.
 
Markets were jolted by the first confirmed U.S. case of the new variant, whose emergence may bring fresh challenges for economic reopening.
 
At the same time, Federal Reserve Chair Powell reiterated that officials should consider a faster reduction of monetary stimulus amid elevated inflation.
 
In Asia, markets were mixed Thursday after a sharp reversal in U.S. shares with Tokyo's Nikkei 225 (-0.65%) and Sydney’s ASX 200 (-0.15%) down, while Hong Kong's Hang Seng (+0.55%) and Seoul's Kospi Index (+1.57%) were higher.
 
 

1. Highest Yielding Bonds are Hit Hardest

 
  • Yield-hungry investors may have gotten burned as concerns over the omicron variant has seen U.S. junk bonds fall in November by the most in over a year
  • Concerns that lower-rated companies will be unable to service the copious amounts of debt they issued during the pandemic saw a sharp decline in the price of the debt, which offset the interest payments such bonds provide.
 
The omicron variant is threatening to derail the borrowing capability of some of the most low-rated U.S. companies which until fairly recently, had no shortage of buyers for their debt.
 
Against the backdrop of low interest rates, yield-hungry investors who would typically not have ventured into high-yielding debt of companies with less than stellar credit ratings may have gotten burned as concerns over the omicron variant has seen U.S. junk bonds fall in November by the most in over a year.
 
A high-yield bond index compiled by Ice Data Services fell by over a percent in November, marking only the second month this year when the gauge has posted a negative total return and provided its worth showing since September last year.
 
Concerns that lower-rated companies will be unable to service the copious amounts of debt they issued during the pandemic saw a sharp decline in the price of the debt, which offset the interest payments such bonds provide.
 
While the full impact of the omicron variant is yet to be fully understood, investors were already selling off debt of the most lowest-rated companies, on concerns that a boom in financing for risky companies could be knocked by tightening monetary policy and interest rate hikes.
 
Sectors hardest hit include the hospitality and travel industries in the U.S., but the U.S. Federal Reserve’s tapering of asset purchases and recent comments by Chairman Jerome Powell about accelerating the cessation of its fiscal stimulus saw pressure across the board on high-yielding debt.
 
Nonetheless, yields on junk bonds are still in line with levels from around the same time a year ago, and borrowing costs remain historically low, in particular because the macro environment continues to remain favorable for borrowers, with low interest rates and low yields in safe securities.
 
 

2. Omicron Could be Black Friday for Assets

 
  • The recent market turmoil caused by the emergence of the omicron coronavirus variant may offer a chance for investors to position for a trend reversal in reopening and commodity trades.
  • Ultimately, this might be a positive for risk assets as it could signal that the end of the pandemic is in sight.
     
Everything appears to be on sale at the moment.
 
Strategists at JPMorgan Chase (-0.59%) are suggesting that the recent market turmoil caused by the emergence of the omicron coronavirus variant may offer a chance for investors to position for a trend reversal in reopening and commodity trades.
 
Some of the equities hardest hit on discovery of the coronavirus variant were in the travel and leisure sectors but there are early indications that while omicron may be more virulent, it is likely to be less deadly and could potentially pave the way for the beginning of the end of the pandemic.
 
Australia, which has maintained relatively stringent pandemic restrictions for the most part, has been surprisingly sanguine over the omicron variant, with Chief Medical Officer Paul Kelly suggesting today in a record message that there is no indication it is more deadly than other strains.
 
Reports surfacing out of South Africa also seem to indicate that the omicron variant only results in mild symptoms, which is significant because it will be unlikely to burden already embattled healthcare systems.
 
Ultimately, this might be a positive for risk assets as it could signal that the end of the pandemic is in sight.
 
According to JPMorgan Chase strategists Marko Kolanovic and Bram Kaplan, who wrote in a note on Wednesday,
 
“Omicron could be a catalyst for steepening (not flattening) the yield curve, rotation from growth to value, selloff in Covid and lockdown beneficiaries and rally in reopening themes.”
 
“We view the recent selloff in these segments as an opportunity to buy the dip in cyclicals, commodities and reopening themes, and to position for higher bond yields and steepening.”
 
Oil has already firmed up on the prospect that the omicron variant will unlikely derail the global reopening while stocks have also steadied.
 
If nothing else, the omicron variant could be a blessing in disguise and based on historical patterns, be the precursor for less severe and more transmissible virus to quickly crowd out more severe variants, turning the deadly pandemic into something akin to the seasonal flue, according to JPMorgan strategists.
 
There is some merit to this view, because as more people are infected with a milder version of the coronavirus by way of the omicron variant, it opens up the prospect that global populations will develop some degree of herd immunity and also box out other more deadly strains.
 
Analogues in nature also exist, where mosquitoes such as the deadly Aedes mosquito are muscled out by irritating but far more innocuous species.
 

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

 

 

 

3. Cryptocurrency Startups are as Hot as the Digital Tokens Themselves

 
  • Crypto and blockchain startups are attracting more VC money in the U.S. than Asia for the first time in four years.
  • Not to be outdone by cryptocurrencies themselves, the amount of venture capital raised by crypto and blockchain startups has increased by almost 7 times for the first 11 months of this year alone.
 
FOMO, or fear of missing out is an all-too-common emotion when plying the cryptocurrency markets.
 
But the companies which create that FOMO on the other hand have for years been ignored by venture capitalists from Shanghai to Sand Hill Road.
 
Yet as Beijing continues its crackdown on cryptocurrencies, the epicenter for the digital asset place is moving back once again to the West, with crypto and blockchain startups attracting more VC money in the U.S. than Asia for the first time in four years.
 
Given the propensity for cryptocurrencies to facilitate capital flight, the Chinese were some of the first to cotton on to the value of these pseudonymous digital assets, raising Beijing’s ire.
 
According to research firm CB Insights, Beijing’s crackdown on the sector has seen the number of cryptocurrency and blockchain startups getting funded plummet dramatically, with many heading south to either Hong Kong or Singapore and to a lesser extent to India.
 
Regulation has been a major concern for investors looking into the cryptocurrency sector and in this regard, Singapore, which has openly declared it intends to become a cryptocurrency hub, has attracted many fans.
 
Singapore rolled out its relatively comprehensive digital payment act, with a licensing regime that has seen more cryptocurrency and blockchain companies relocate their headquarters to the business hub.
 
Excellent infrastructure, the ease of doing business and a venture capital space that has grown over the past decade are also seen as attractive, as are low corporate taxes and the lack of a capital gains tax.
 
Given that the Biden administration’s infrastructure legislation includes sweeping provisions which could have tax implications for the cryptocurrency and blockchain industry, VCs in the U.S. remain somewhat wary and have lobbied hard for greater regulatory clarity.
 
CB Insights notes that the fourth quarter of 2021 has already gone on record as the biggest ever for cryptocurrency startup fundraising, despite the quarter being far from over.
 
Coincidentally, the increase in funding rates has also dovetailed with cryptocurrencies such as bitcoin and ether setting fresh all-time records.
 
Not to be outdone by cryptocurrencies themselves, the amount of venture capital raised by crypto and blockchain startups has increased by almost 7 times, from around US$3.1 billion for all of last year, to US$21.3 billion for the first 11 months of this year alone.
 
 

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 +4.19% in November, adding to the +13.22% for October 2021 and marking three straight months of gains. 
 
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 02, 2021

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