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Novum Alpha - Daily Analysis 8 December 2021 (10-Minute Read)

Risk assets are recovering after a bout of turbulence sparked by the emergence of the new virus variant. Omicron cases haven’t overwhelmed hospitals and vaccine developments are promising.

 
A wonderful Wednesday to you as markets wind their way higher in a strong rebound.  
 

In brief (TL:DR)

 
  • U.S. stocks continued to rise Tuesday with the Dow Jones Industrial Average (+1.40%), the S&P 500 (+2.07%) and the Nasdaq Composite (+3.03%) all rebounding sharply. 
  • Asian stocks opened higher after technology shares led U.S. equities to their biggest rally in nine months as traders bet the omicron Covid-19 variant won’t stall the global recovery.
  • Benchmark U.S. 10-year Treasury yields dipped one basis point to 1.46% (yields fall when bond prices rise).
  • The dollar held a decline against most of its major peers.
  • Oil inched lower after surging past $72 a barrel in New York with January 2022 contracts for WTI Crude Oil (Nymex) (-0.12%) at US$71.96.
  • Gold edged higher with February 2022 contracts for Gold (Comex) (+0.33%) at US$1,790.60. 
  • Bitcoin (-0.47%) fell to US$50,447 as traders took some profits off the table with technicals suggesting that the cryptocurrency may have been oversold. 
 

In today's issue...

 
  1. It Doesn’t Matter if Central Banks Tighten Inflation will Persist
  2. The Year’s Most Successful IPO will Surprise You
  3. Cryptocurrency “Fear & Greed” Index? What next, goat entrails?
 

Market Overview

 
Risk assets are recovering after a bout of turbulence sparked by the emergence of the new virus variant. Omicron cases haven’t overwhelmed hospitals and vaccine developments are promising.
 
Markets may not be clear of further turbulence amid lingering worries about central banks’ response to elevated price pressures, new restrictions to stem the spread of omicron and ratcheting up of geopolitical tensions.
 
Meanwhile, the list of Chinese developers warning they may not be able to meet upcoming financial obligations is growing.
 
In Asia, markets rose Wednesday with Tokyo's Nikkei 225 (+1.48%), Sydney’s ASX 200 (+1.75%) and Seoul's Kospi Index (+0.87%) all up, while Hong Kong's Hang Seng (-0.12%) was slightly down in the morning trading session.
 
 

1. It Doesn't Matter if Central Banks Tighten Inflation will Persist

 
  • Central banks appear to be of the view that inflation is like a dial on a thermostat that they can adjust, and this is misguided.
  • And while monetary expansion has not been confined to the U.S., it has been the most aggressive in literally throwing money at the pandemic.
     
Raising interest rates and tapering asset purchases can help prevent the next bout of inflation, but it can’t fix the inflation already created.
 
Just as pouring less water into an already overflowing bucket will just slow down when it eventually overflows, central banks appear to be of the view that inflation is like a dial on a thermostat that they can adjust, and this is misguided.
 
When oil prices collapsed to negative last May, few would have even though of the word “inflation” let alone mentioned it.
 
Yet students of monetary policy would have no doubt seen that flooding the financial system with unprecedented levels of liquidity would eventually have consequences once the world charted a path out of the pandemic.
 
And now those chickens have come home to roost.
 
Between last March, when the pandemic hit the U.S., to this November, M2, or the broad money supply has soared by 24%, or almost a quarter, more than any time in the one hundred and fifty years that data has been measured.
 
And while monetary expansion has not been confined to the U.S., it has been the most aggressive in literally throwing money at the pandemic.
 
This will ultimately hurt bondholders and investors with typical 60/40 stock and bond portfolio splits.
 
Treasury yields respond indirectly to their price and the continued hunger for haven assets has kept yields low, because of their strong short-term ability to hedge and cushion sharp decline in risk assets like stocks.
 
But this “insurance” is imperfect and over time will get more expensive.
 
Over the past year, Treasuries have demonstrated an uncanny correlation with risk assets, with periods where both fell in unison.
 
And higher consumer prices will conspire to erode the purchasing power of bonds as well, which means that bond rates (the coupon) will rise, perhaps far beyond what central banks and economists forecast.
 
Because there’s no such thing as a free lunch and because the pandemic’s various packages need to be paid for by someone, and in this case, it will be the Treasury bondholder.
 
 

2. The Year's Most Successful IPO will Surprise You

 
  • SK Bioscience (+4.90%) is up a staggering 262% since trading started in Seoul in the first quarter of this year, the most among 94 major offerings since January according to data compiled by Bloomberg.
  • Markets have been reacting to reports suggesting that cases of the omicron variant have been relatively mild which has seen traders rotate out of defensive healthcare stocks.
     
Forget Paytm (+0.72%) or Deliveroo (+1.75%), the world’s most successful IPO over a billion this year has been a South Korean biopharmaceutical company most global investors would never have heard of, SK Bioscience, which has been the top gainer this year.
 
SK Bioscience is up a staggering 262% since trading started in Seoul in the first quarter of this year, the most among 94 major offerings since January according to data compiled by Bloomberg and in a year which has seen almost half of all blockbuster IPOs now trade below their offering price.
 
To be fair, SK Bioscience has been in the right place at the right time, with one of its core businesses the local Covid-19 vaccine production partner for AstraZeneca (-1.67%).
 
But the South Korean stock market is also not typical of western bourses, which tend to be dominated by institutional investors and hedge funds.
 
As much as 80% of flows in South Korea consist of retail investors, who pushed shares of SK Bioscience as well as several other initial listings at their trading debuts.
 
But ballooning valuations have made regulators step in with greater regulatory scrutiny, and SK Bioscience is now well off its record high in August, after local media reported at the time that the company would start shipping 1.1 million doses, in a classic “buy the rumor sell the news” trade.
 
December has otherwise been a challenging month for SK Bioscience, which has since retreated some 16% since the start of the month and among a slew of other healthcare companies whose shares were hammered following a slump in U.S. biotech firms.
 
Markets have been reacting to reports suggesting that cases of the omicron variant have been relatively mild which has seen traders rotate out of defensive healthcare stocks.
 

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

 

 

 

3. Cryptocurrency "Fear & Greed" Index? What next, goat entrails?

 
  • The index, which ranges from 0 for Extreme Fear to 100 for Extreme Greed now sits around 28, suggesting that traders may be a touch too bearish.
  • With bitcoin hovering around the US$50,000 level, some traders have made an argument that the benchmark cryptocurrency may have been oversold.
 
Because cryptocurrencies are such a nascent asset class, with as many narratives to explain their price movements as there are digital tokens available, it’s understandable that traders hoping to find some method in the madness would fall back on the tools of Wall Street.
 
And the latest crystal ball being proffered to determine price movements has been a “Fear & Greed” index on where else but Twitter.
 
Call it the Bloomberg terminal for cryptocurrencies if you will, but the Twitterverse has been aflutter with all manner of explanations for last Saturday’s flash crash in cryptocurrencies that saw bitcoin plunge by over 20% in the span of a few hours.
 
An estimated US$200 billion in the market cap of digital tokens was wiped out in what some analysts have termed a “healthy deleveraging” of the cryptocurrency markets.
 
On Wall Street, a traditional Fear-Greed indicator measures investor sentiment based on factors such as volatility, momentum and demand, but the cryptocurrency version, developed by alternative.me, seeks to establish if traders are too bullish (greed) or too bearish (fear) and includes other factors like social media trends and Google search terms.
 
The index, which ranges from 0 for Extreme Fear to 100 for Extreme Greed now sits around 28, suggesting that traders may be a touch too bearish.
 
With bitcoin hovering around the US$50,000 level, some traders have made an argument that the benchmark cryptocurrency may have been oversold.
 
Because there are so few tools to use in the cryptocurrency universe to gauge sentiment, it is understandable that traders would fall back on whatever is available, even if it’s not an entirely perfect solution.
 
The reality is that no indicator or index can perfectly predict market movements – there are no silver bullets.  
 
 

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 +2.19% recorded in September. 
 
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 08, 2021

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