Novum Alpha - Daily Analysis 14 December 2021 (10-Minute Read)
A terrific Tuesday to you as markets take a turn for the worse on increasing uncertainty and the prospect that both fiscal and monetary stimulus could get sucked out of the financial system.
In brief (TL:DR)
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In today's issue...
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Market OverviewInvestors are continuing to grapple with the implications of reduced central bank support and are awaiting more clarity on the economic threats from omicron.
Traders are braced for the U.S. Federal Reserve to taper stimulus more quickly and signal an interest-rate liftoff in 2022, both potential economic challenges, but these risks may have been overly priced in.
Concerns about China’s property sector have also flared anew, and the real-estate downturn likely contributed to a slowdown in the nation’s economic activity in November.
In Asia, markets slipped Tuesday with Tokyo's Nikkei 225 (-0.48%), Sydney’s ASX 200 (-0.04%), Seoul's Kospi Index (-0.63%) and Hong Kong's Hang Seng (-1.05%) all lower in the morning trading session.
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1. Risk Assets Hinge on a West Virginia Senator
Never before has so much, hinged on one man. Well, that’s not entirely true, there have been plenty of times in history where the fate of the world hinged on one man and it’s not just been in Marvel movies.
But investors looking for an early Christmas may find a lump of coal in their stockings as U.S. Senator for West Virginia Joe Manchin presents himself as a potential roadblock for the Biden administration’s US$1.75 trillion Build Back Better bill.
Time is running out to win over Democratic holdouts as the Democrats attempt to pass the fiscal stimulus in the Senate, without any help from the Republicans.
Using a Senate procedure called reconciliation, Democrats could bypass the 60-vote filibuster threshold because they hold a razor thin majority in the upper house, with 50-50 and Vice President Kamala Harris able to case the tiebreaking vote.
But this also means that Democrats need the buy-in from every single Democratic senator, some of whom are concerned that the additional spending bill comes at a time of rising prices.
Manchin is one of those senators and while he has been conversing regularly with Biden, the jury is still out over whether the Build Back Better bill will get passed in time for Christmas.
While the Build Back Better bill covers a wide variety of spending goals, the bulk is being spent on families through the expansion of childcare, paid family and medical leave, as well as a host of environmental and climate initiatives, including renewable energy tax credits and other investments.
Spending on transportation and efforts to rehabilitate America’s crumbling infrastructure is present, but forms a smaller proportion of the overall bill.
The threat that the US$1.75 trillion spending bill will not be passed has caused some degree of volatility in the markets already, against a backdrop of potential monetary tightening, a lack of a fiscal boost could see a slump in risk assets.
The Congressional Budget Office, an independent, non-partisan organization noted that the Build Back Better bill could “result in a net increase in the deficit totaling US$367 billion over the 2022-31 period.”
The White House has hit back against the CBO’s projections, insisting that the bill would be “more than fully paid for” arguing that the federal deficit would actually be reduced by US$112.5 billion.
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2. Beijing Discovers What It's Like to Shoot the Economy in the Foot
China is discovering for itself just how much of its economy is reliant on the real estate sector, with economic activity likely to have slowed in November due to the worsening downturn in the property sector and still subdued consumption.
For some reason, Chinese Communist Party apparatchiks believed that they could tank the real estate sector and people would continue to consume, helping to shift China’s economy towards a more consumption-based one.
But that naïve belief by Beijing belies the reality on the ground in China, where generations of Chinese have known nothing but economic strife and insecurity, and naturally when they have some money in their pockets, are going to want to put it on some bricks and mortar assets such as real estate.
China’s financial markets are also relatively immature, and while its stock markets continue to grow, Beijing’s response, for instance in the wake of the 2015 Shanghai stock market crash, which saw as much as a third of market capitalization wiped off, threatened short sellers with arrest.
With the real estate sector, it appears that Beijing is intent not to have the bubble and bust in stocks through the use of margin and leverage in 2015, repeat itself in the real estate sector in our current epoch.
But the noticeable economic slowdown, at a time when energy and commodity prices are rising, has prompted Beijing to shift policy direction this month, with the People’s Bank of China and the Communist Party ordering more fiscal spending for 2022.
It’s not entirely clear whether that support will be enough to reverse the fallout from the crackdown in real estate, which has triggered defaults at China Evergrande Group and a growing list of developers.
Plummeting sales and unfinished projects are all threatening to rattle ordinary Chinese who saw real estate as a means to get rich quick.
An entire generation that has known real estate prices to only travel in one direction is now having to content with price falls of new homes for the three months from September.
And that’s had a spillover effect on consumer sentiment, with retail sales increasing at the slower pace of 4.7% in November, compared with 4.9% in October, despite the “Singles Day” shopping festival.
Making matters worse, fresh Covid-19 outbreaks are threatening to derail any recovery, with the consumption of services, restaurants and discretionary spending at physical stores all plummeting.
The speed of the slowdown has surprised some high-level officials in Beijing, but it’s less clear if things can be turned around.
Beijing can’t walk back its property curbs without losing face and admitting that the Communist Party has made a mistake – the Communist Party “never” makes mistakes.
Which is why much of the support for the Chinese economy has had to occur on the fringes, by making mortgages more readily available and by loosening credit conditions.
Nonetheless, with 70% of the economy tied to real estate and 29% of GDP generated from the sector, Beijing is finding out the hard way what happens when you yank the cord suddenly.
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Find out more about Novum Alpha as leading luxury portal Luxuo.com interviews our CEO & General Counsel, Patrick Tan...
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3. Bitcoin Bombs by Over 30% from Record High
More volatility is on the cards for cryptocurrencies ahead of major macro moves from the U.S. Federal Reserve and the possible failure of the Biden administration to pass a US$1.75 trillion fiscal stimulus package.
Tumbling alongside other risk assets, the benchmark cryptocurrency declined below its 200-day moving average, with bitcoin dropping for five consecutive weeks.
While bitcoin saw a bit of a bump on a report that U.S. consumer prices increased to a four-decade-high last Friday, it is still down over 30% from its all-time-high of close of US$69,000 last month.
Macro issues are likely to come into sharp focus in the remaining weeks of 2021, to determine what happens next for bitcoin.
Expectations that monetary policy will tighten at the U.S. Federal Reserve have already been priced in somewhat in bitcoin, with evidence that there is some buying activity on the off chance that the central bank does not accelerate the pace of its tapering.
Last month, the Fed announced that it would taper its US$120-billion-a-month asset purchases by US$15 billion, implying that quantitative easing would end by next June.
However, six months of headline inflation exceeding 5%, with prices in the U.S. on track to increase by their fastest in over four decades has put increasing pressure on the Fed to reign in persistently higher prices.
Investors are concerned that the easy money period of the Fed may be over and are moving out of risk assets into bonds, and that’s affected bitcoin in particular and cryptocurrencies in general.
Nonetheless, a reversal (the magnitude of which is difficult to forecast) could be possible if the Fed doesn’t accelerate the end of its asset purchases but rather keeps the current pace.
Which means that rates are only likely to rise in the second half of next year, and if so, confine the number of rate increases to two.
The passing of Biden’s US$1.75 trillion Build Back Better bill could also fuel another surge in risk assets as well, especially if it is passed before the end of the year.
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Dec 14, 2021