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Novum Alpha - Weekend Edition 4-5 December 2021 (10-Minute Read)

With more twists and turns than an episode of daytime soap opera Days of Our Lives, like sands through the hour glass, investor confidence is slipping into a pile of sand as risk assets tanked on Friday against a backdrop of U.S. Federal Reserve policy shift and inconsistent U.S. job data. 

A wonderful weekend to you as stocks get cratered and equity markets tank with mixed U.S. job numbers. 
 
In brief (TL:DR)
 
  • U.S. stocks recovered Thursday with the Dow Jones Industrial Average (-0.17%), the S&P 500 (-0.84%) and the Nasdaq Composite (-1.92%) all lower and mega tech stocks being eviscerated amidst wild swings throughout the day. 
  • Asian stocks closed a mixed bag on Friday with key U.S. jobs data and U.S. Federal Reserve resolve yet to hit Asian markets in time to cause too much trouble, Monday will be a challenge. 
  • Benchmark U.S. 10-year Treasury yields collapsed to 1.357% (yields fall when bond prices rise) as investors sought safety and on news that the Fed was determined to taper asset purchases to reign in inflation. 
  • The dollar was flat. 
  • Oil slipped with January 2022 contracts for WTI Crude Oil (Nymex) (-0.36%) at US$66.26 as U.S. job numbers delivered mixed signals. 
  • Gold rallied with February 2022 contracts for Gold (Comex) (+1.20%) at US$1,783.90 amidst the turmoil in other risk assets. 
  • Bitcoin (-6.99%) capitulated to US$52,539 into the weekend against a broad selloff of risk assets as the benchmark cryptocurrency continues to fall. 

In today's issue...

 
  1. Grab's SPACtacular Fall
  2. Central Bankers are Not Healthcare Professionals
  3. Ethereum's Evolution Should Get Investors Excited

 

 

Market Overview

 
With more twists and turns than an episode of daytime soap opera Days of Our Lives, like sands through the hour glass, investor confidence is slipping into a pile of sand as risk assets tanked on Friday against a backdrop of U.S. Federal Reserve policy shift and inconsistent U.S. job data. 
 
Whether it's been prolonged exposure to higher prices or pressure from the Biden administration, the market's best friend, the otherwise dovish U.S. Federal Reserve Chairman Jerome Powell (set for another four year term) has apparently developed a hawkish bent. 
 
A mixed U.S. jobs report did nothing to prevent another bout of intense volatility, and there is a sense that policymakers are likely to follow through with faster asset purchase tapering to usher in a period of higher interest rates. 
 
In Asia, markets closed mixed Friday with Tokyo's Nikkei 225 (+1.00%), Sydney’s ASX 200 (+0.22%) and Seoul's Kospi Index (+0.78%) up, while Hong Kong's Hang Seng (-0.09%) was down as they managed to avoid the bulk of the carnage without being privy to U.S. jobs data. 
 

 

1. Grab's SPACtacular Fall

 
  • Shares of Grab fall after the world's biggest SPAC deal valued the company at US$40 billion
  • Whilst still unprofitable, investors may still be keen on Grab as it's thematic play on the digitalization of Southeast Asia remains attractive 
 
In a year that has seen high profile IPOs like Deliveroo (-8.23%) and Paytm (+2.76%) tank, the entry of Southeast Asian ride-hailing and delivery app Grab was always going to be dicey.
 
So it was no surprise when shares in the Singapore-headquartered company fell sharply on their Nasdaq debut on Thursday, even after the super app closed a record US$40 billion merger deal with New York blank check company Altimeter Growth, a special purpose acquisition company or SPAC.
 
One of the most valuable technology companies in Southeast Asia, Grab offers food delivery, ride-hailing and financial services, including a digital wallet.
 
With backing from high-profile global investors including T Rowe Price, sovereign wealth fund Temasek as well as Abu Dhabi’s Mubadala, Blackrock and Fidelity, the speed and ferocity of Grab’s fall caught even the most restrained investors by surprise.
 
This year has not been particularly kind for fresh listings whether through SPACs or traditional IPOs, with over half of all IPOs valued at over US$1 billion all trading below their offering price.
 
Part of the reason has been overly optimistic promoters, many of whom priced IPO shares towards the higher end of the band, and few takers once these shares hit the open markets.
 
By Thursday’s close, Grab’s shares were trading at just US$8.75 and market cap had plummeted to US$34.6 billion.
 
There may be some “SPACtigue” by now as investors baulk at the backdoor listing methodology which lack bookmakers to support the price of shares of these companies once they hit the market floor.
 
Timing could also have been a factor for Grab’s SPACtacular fall from grace, with concerns over the omicron variant likely to dampen demand for ride-hailing in Southeast Asia.
 
Grab, which has yet to be profitable, was nonetheless able to capitalize on investor interest in the digital transformation of Southeast Asia to pull off the world’s biggest SPAC deal, whether that interest is sustainable remains to be seen. 
 

 

2. Central Bankers are Not Healthcare Professionals

 
  • Central bankers are increasingly likely to make policy mistakes as they are unable to judge the impact of new coronavirus variants like omicron 
  • Do too much and policymakers risk stoking inflation, do nothing, and economies riled by new variants may tank 
     
In a world that is growing increasingly multi-disciplinary, central bankers who have dedicated a lifetime to the study of macroeconomics, monetary and fiscal policy are now finding themselves students of virology as the coronavirus pandemic continues to throw up variables in their finely tuned policy calculations.
 
Even as the jury remains out on the implications of the omicron variant, the U.S. Federal Reserve’s Chairman Jerome Powell has reiterated the central bank’s resolve to bring forward the tapering of asset purchases, potentially paving the way for an earlier-than-anticipated rate hike.
 
Powell has said on repeated occasions that the Fed would not contemplate a rate hike while it was still purchasing assets and has since dropped use of the word “transitory” when it’s come to inflation.
 
Even as headline inflation has soared over 5% for six straight months, Powell and his dovish colleagues at the Fed maintained steely resolve to pursue gainful levels of employment and appeared determined to maintain the Fed’s accommodative stance.
 
But now with prices persistently high and U.S. President Joe Biden facing abysmal approval ratings, pressure is rising for the central bank to do more to reign in price increases.
 
Against this backdrop, uncertainty surrounding the omicron variant and its vaccine resistance mean that policymakers including Powell are essentially crossing the river in the darkness by feeling for the next stone to fjord.
 
To be sure, Powell and his colleagues at the Fed are not virologists, but the economy increasingly expects them to be, especially at a time when the paths of growth and inflation were almost certain before the arrival of the omicron variant.
 
And while scientists and healthcare officials won’t know the full impact of the omicron variant until weeks from now, central bankers need to gather to set policy well ahead of that.
 
The U.S. Federal Reserve, the Bank of England and the European Central Bank all have their policy meetings scheduled towards the middle of this month and it will be interesting to see what they, in their collective wisdom, ultimately decide is the best course.
 
Will omicron be a drag on demand that requires continued dovishness? Or would an accommodative stance just throw more fuel on the raging fires of inflation, requiring a pullback in support?
 
For central bankers, the best-case scenario would be for omicron to become the dominant variant, virulent but with mild symptoms and without taxing the embattled healthcare systems of countries, which would set the stage for the pandemic to finally become endemic.
 
But central bankers are not virologists and they can at best make educated guesses based on the information they have at the time.
 
Given the circumstances, doing nothing might actually be the best option for policymakers and instead respond once things become clearer, which is what central banks have been doing throughout the pandemic. 
 

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

 
 

3. Ethereum's Evolution Should Get Investors Excited

 
  • Layer 2 solutions may allow the Ethereum blockchain gain greater efficiency by only using the main blockchain for the settlement of large tranches of transactions 
  • Layer 2 chain solutions provide for the prospect of greater efficiency, lower transaction costs and higher throughput on the Ethereum blockchain 
 
While ether’s stronger rally compared to bitcoin has garnered headlines, investors should really be focusing on the groundbreaking technological innovation that could drive Ethereum’s next phase of growth.
 
For years, slow transaction speeds and high fees have been a constant bugbear for traders and developers on the US$550 billion Ethereum network – home to some of the world’s most popular blockchain applications.
 
But so-called Layer 2 technologies could provide a way out for Ethereum to reassert its dominance as Solana and Avalanche have been nipping at the incumbent smart contract blockchain’s heels.
 
While Ethereum was designed to slow down and become more expensive with increasing popularity, Layer 2 projects, many of which have only just debuted, could take some of the transaction data off the Ethereum blockchain, compress it and post it back onto the original chain for a fraction of the time and cost.
 
Think of it a bit like how a casino operates, swapping cash for chips only occurs at the entry and exit of the casino – not on every hand that is played.
 
Right now, most applications that sit atop the Ethereum blockchain update the chain every time a process is executed, expending gas (transaction) fees.
 
But with Layer 2, only the stuff that matters gets pushed onto the Ethereum blockchain, in other words, the final settlement.
 
If Layer 2 takes off, blockchains like Ethereum might only be directly used for very large transactions in the future, like chunking, with the bulk of activity or the microtransactions, happening on Layer 2 networks.
 
So far, about US$7 billion worth of value is locked on Layer 2 chains, a huge jump from just US$48 million at the start of this year, according to tracker L2Beat.
 
But barriers to these Layer 2 solutions still exist and it can take up to a week to move cryptocurrency from some Layer 2 networks onto the Ethereum blockchain without additional technology called “bridges” and not enough popular applications use Layer 2 networks yet.
 
Nonetheless, further development could iron out some of these teething problems and encourage greater adoption, which will ultimately be good for Ethereum and its cryptocurrency ether.
 
Ethereum is currently considering a proposal from its cofounder Vitalik Buterin, that could potentially cut Layer 2 transaction costs by as much as a factor of five.  
 
 

What can Digital Assets do for you?

 
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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. 
 
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Dec 04, 2021

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