Novum Alpha - Daily Analysis 7 December 2021 (10-Minute Read)
Things may be turning but investors still see further turbulence ahead for equity markets. New restrictions are showing up across the world as authorities try to stem the spread of omicron and inflation remains stubbornly high in developed economies.
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A terrific Tuesday to you as markets take a turn for the better.
In brief (TL:DR)
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In today's issue...
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Market OverviewThings may be turning but investors still see further turbulence ahead for equity markets. New restrictions are showing up across the world as authorities try to stem the spread of omicron and inflation remains stubbornly high in developed economies.
China’s policy makers moved to expand support for the economy Monday as a property-market downturn threatens to hamper growth.
Easing of monetary conditions to shore growth in the world’s second-largest economy should offer some succor for markets whipped by bouts of volatility.
The faster pace of Fed tapering of its bond-buying, which will pave the way for raising rates next year to combat elevated inflation, has tested investors’ appetite for risk, but those concerns have been set on the back burner for now.
In Asia, markets rose Tuesday with Tokyo's Nikkei 225 (+1.27%), Sydney’s ASX 200 (+0.62%), Hong Kong's Hang Seng (+1.21%) and Seoul's Kospi Index (+0.14%) all up in the morning trading session.
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1. China Loosens Even as the West Mulls Tightening
Central bankers from the U.S., Europe and the U.K. will be watching closely as Beijing moved yesterday to cut the amount of cash most banks must hold in reserve, a move to counter the country’s dramatically slowing economic and in a departure from other major central banks.
Reducing the reserve requirement ratio by December 15, or around the time that the European Central Bank, the Bank of England and the U.S. Federal Reserve are all set to meet independently to chart their own monetary policy, the move by the People’s Bank of China stands in stark contrast to western central banks increasingly concerned over inflationary pressures.
This marks the second time this year that the PBoC has reduced reserve requirement ratios and it is expected that some US$188 billion of liquidity would be released into the Chinese economy.
The decision by the PBoC comes even after an improvement in recent industrial and economic data and comes after top leaders pledged to stabilize the economy in 2022.
Given that next year will be a crucial year for Chinese President Xi Jinping to establish himself in an unprecedented third term in power and pave the way for him to rule the world’s second largest economy indefinitely, Chinese Communist Party apparatchiks are eager to ensure that Xi’s iron grip on power is strengthened and for that the economy must continue to hum along.
Harsh property curbs and crackdown on China’s tech sector have left investors nursing over US$1 trillion in losses since the purge began, but Beijing may be easing up with the prospect of some property curbs easing.
A recent Chinese Politburo meeting pledged to focus on stabilizing macroeconomic conditions and ensure that the economy continues to grow in a reasonable range, which some observers have taken to include lifting some of the restrictions on the important real estate sector.
China’s real estate sector makes up some 70% of the economy either directly or indirectly and a further 29% of GDP.
But the PBoC was quick to emphasize that the decision to reduce the reserve requirement ratio for Chinese banks was not the start of an easing cycle, and cautioned against such expectations.
With the Fed looking to possibly reduce asset purchases at an accelerated pace this month, paving the way for rate hikes as early as next spring, the PBoC move marks a departure from the rest of the world but China is also confronting a different set of economic circumstances.
Ill-advised and sudden decisions to crackdown on tech, coal-fired power plants and the real estate sector all at once are reflective of the obsequious exuberance of Communist Party bureaucrats with little regard of their cumulative economic effects.
Now that Beijing has had an opportunity to see what happens when you yank all the sockets out at once, the regular brown outs (long a thing of the past) and reduced factory hours are starting to grind on the population.
Although Chinese state media has been quick to blot out any signs of dissent, there have been reports that factory workers have been protesting (where possible) more frequently and Beijing has been quietly pushing coal-fired power stations to ensure that the country grid stays up.
Meanwhile, the initial purge of China’s tech sector also appears to be easing, with a string of hefty fines issued, but no move to break up some of China’s biggest companies.
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2. What caused the U.S. Federal Reserve to pivot?
To be fair, nothing has changed, yet.
The U.S. Federal Reserve is still soaking up US$105 billion of U.S. Treasuries and asset backed securities every month and interest rates are still near zero.
But about four weeks ago, the Fed set in motion carefully choreographed plans to gradually wind down a bond-buying stimulus program by June next year, and at a policy meeting this week, may ratchet up the pace of that tapering to March next year.
The shift opens the prospect of the Fed raising interest rates next spring, rather than later in the year to curb inflation, marking a significant policy shift from U.S. Federal Chairman Jerome Powell, who has for some time, considered price pressures to be “transitory.”
So what gives?
Investors certainly could not have expected stimulus to continue indefinitely, that would be naïve, and at some stage, surely the Fed would be expected to return to a more normal monetary policy.
The bigger issue has always been, when those policy shifts would occur, and by how much.
What the market may primarily be concerned with is that Powell, who needs Senate confirmation to secure an additional 4-year term, which is almost a given, may have had a hawkish turn to focus more on restraining inflation, which has surged this year.
Headline inflation in the U.S. has topped 5% for six consecutive months, according to Consumer Price Index data from the Department of Labor Statistics, their highest increase in over three decades.
At the crucial Fed policy meeting due in a week’s time, it’s likely that policymakers will drop the “transitory” label from any future description of inflation, but part of that may be a public relations effort in coordination with the Biden administration.
Biden’s approval ratings are abysmally low and a main bugbear for Americans is perceptions that the president is not focusing on the things that matter, for instance the soaring cost of goods and services.
Yet a dovish turn by the world’s second largest economy and the factory to the world may help to alleviate some supply chain side price pressures.
The People’s Bank of China has reduced the reserve requirement ratio for its banks by a further 50 basis points.
And while the PBoC has warned that the move should not be interpreted as a loosening of monetary policy, its effect of pushing a fresh US$188 billion into the Chinese economy looks exactly like what it is – a stimulus package.
Easier lending conditions could alleviate some of the issues facing Chinese manufacturers who have of late had to contend with everything from brown outs to fresh outbreaks that have left many factories operating at diminished capacity.
Powell and his colleagues though may have their work cut out for them.
Whilst the Fed has admirably tried to make any shifts subtle, the pressure is on policymakers to act more aggressively.
U.S. unemployment has dipped to 4.2% in November, from 4.6% a month earlier and a November 16 report showed that consumer spending at retail stores, online sellers and restaurants rose sharply in October.
Against this backdrop, hawks in the Fed may have seized the moment to steer the central bank back towards a more normal monetary policy.
Nonetheless, the Fed still expects inflation to decline next year, but Powell has indicated that the central bank has no intention to go all-in on that assumption.
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3. Bitcoin Buffeted by Macro Headwinds, Altcoins Not So
In a sharp reversal for bitcoin bulls who have long been comforted by bitcoin’s track record of moving far more quickly than the so-called altcoins (anything else that isn’t bitcoin), the altcoins are being less affected by macro events and charting their own path.
Bitcoin has long been touted as adding value to a portfolio thanks in large part to its lack of correlation with other asset classes, including stocks, bonds and commodities.
But that assumption has come under challenge of late as growing interest and investment in bitcoin has seen it taken on the same levels of volatility and exposure to macro trends as other asset classes.
Bitcoin’s growing susceptibility to macro events was on full display this weekend as it fell far more sharply compared with altcoins.
Even though the sharp correction in bitcoin on Saturday, where the benchmark cryptocurrency fell by over 20%, could be in large part attributed to cascading deleveraging across the market, it still does little to explain why altcoins like ether, which fell around 17%, saw relatively milder losses.
And despite bitcoin falling below US$50,000 over a tumultuous weekend of trading, ether, which would be expected to fall below the crucial US$4,000 level of support, stayed stubbornly above.
In a note on Sunday, Fundstrat head of digital asset research Sean Farrell said,
“The rest of the crypto market recovers at a much faster pace than bitcoin.”
Farrell cited three events last Friday which may have contributed to bitcoin being affected by macro uncertainty – news on the omicron variant, reaction to potential for an expedited Fed taper and action in the derivatives market.
Because more institutional investors are involved with bitcoin now than at any other point in history, the odds are that bitcoin will be more susceptible to macro shifts is a given, and with it, its portfolio balancing ability, especially during times of general uncertainty and volatility.
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Dec 07, 2021