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Novum Alpha - Daily Analysis 21 December 2021 (10-Minute Read)

A terrific Tuesday to you as markets take a turn for the worse thanks to the stonewalling of the Biden administration's spending bill that sent equities in a tailspin.

 

In brief (TL:DR)

 
  • U.S. stocks continued to fall into Monday with the Dow Jones Industrial Average  (-1.23%), the S&P 500  (-1.14%) and the Nasdaq Composite  (-1.24%) all down sharply as Democratic Senator Joe Manchin blocks Biden's social spending bill. 
  • Asian stocks rose Tuesday, providing some respite from the dour investor mood caused by escalating omicron coronavirus cases and challenges for U.S. President Joe Biden’s economic agenda.
  • Benchmark U.S. 10-year Treasury yields were stable at 1.42%.
  • The dollar was little changed.
  • Oil continued to fall with February 2022 contracts for WTI Crude Oil (Nymex) (-3.71%) at US$68.23 as Biden's economic agenda which would have meant infrastructure spending as well, hits the skids.  
  • Gold was lower with February 2022 contracts for Gold (Comex) (-0.24%) at US$1,790.30. 
  • Bitcoin (+0.60%) rose slightly to US$46,962 as the prospect of stalled fiscal stimulus in the U.S. put a damper on risk sentiment. 
 

In today's issue...

 
  1. Software Insiders are Selling Stocks
  2. Traders Are Betting the Fed will Blink on Rates
  3. Bitcoin Barrels Towards 2022 Below US$46,000
 

Market Overview

 
Investors are trying to evaluate how long and deep a hit global economic reopening faces from the omicron flareup, as a variety of nations step up mobility curbs.
 
Such restrictions could add to pandemic-era supply chain and labor snarls that have stoked inflation and prompted central banks to tighten monetary settings.
 
U.S. markets were hammered as Democratic Senator Joe Manchin stonewalled on U.S. President Joe Biden's economic agenda which would have pumped US$1.75 trillion of fresh spending over the next few years. 
 
In Asia, in contrast, markets rose Tuesday with Tokyo's Nikkei 225 (+1.88%), Hong Kong's Hang Seng (+0.59%), Sydney’s ASX 200 (+0.45%) and Seoul's Kospi Index (+0.52%) all green in the morning trading session. 
 
 

1. Software Insiders are Selling Stocks

 
  • A spate of stock sales by the leaders of some of the hottest software companies is suggesting that all is not well in the state of silicon.
  • Nonetheless, that so many tech executives are selling stock is not a good look and comes at a time when valuations are already extended.
     
It’s not reassuring when the ship’s captain starts donning a lifejacket while telling everyone else to remain calm.
 
Yet a spate of stock sales by the leaders of some of the hottest software companies is suggesting that all is not well in the state of silicon.
 
Against the backdrop of potential monetary policy tightening by the U.S. Federal Reserve, the chief of U.S. software company Snowflake cashed out his chips and sold over US$344 million worth of shares in the company, taking his total sales this year to over US$600 million.
 
To be fair, Snowflake (-0.34%) CEO Frank Slootman was not the founder of the database software company, but was brought in to take the company public following a surge in demand for cloud software since the start of the pandemic, making it one of the hottest corners of the tech sector.
 
But the selling by insiders at Snowflake is significant enough to be disconcerting, with the company’s chief financial officer, Michael Scarpelli also selling about US$241 million worth of shares this week.
 
Scarpelli and Slootman are hardly alone, with Eric Yuan, head of the video conferencing software tool of the pandemic Zoom Video Communications (-0.89%) dumping US$609 million worth of stock this year, according to research from InsiderScore.
 
But unlike Scarpelli and Slootman, Yuan’s sales have been into a falling market, with Zoom’s share price slipping about 67% from its peak last year.
 
Meanwhile Dave Duffield, chairman of the human resources software company Workday (-1.53%) and Henry Schuck, CEO of ZoomInfo which runs a database of business contacts cleared a combined US$600 million by selling shares of their company this year, according to InsiderScore.
 
While it may seem as if software company insiders are looking to sell stocks ahead of tightening monetary policy that could see their valuations come back down to earth, a proposed change in rules by the U.S. Securities and Exchange Commission may be at the heart of the selloff.
 
The SEC is looking to tighten the rules around share sales by corporate insiders, and executives may be selling stocks now before the rule change.
 
Tax may also be at the heart of the recent rush to sell stocks, with the Democrats in power in Washington, capital gains made from the sale of company stock may be ripe for the picking as politicians rifle through the couch cushions in search of revenues to replenish their depleted coffers.
 
Nonetheless, that so many tech executives are selling stock is not a good look and comes at a time when valuations are already extended.
 
Case in point was DocuSign (-4.70%) CEO Dan Springer, who had already sold US$82 million worth of shares in the electronic signature company well before it issued a disappointing sales forecast that saw its shares plunge by over 40%.
 
Coincidence? Perhaps, but it doesn’t look great.
 
 

2. Traders Are Betting the Fed will Blink on Rates

 
  • Investors are betting that the U.S. Federal Reserve will blink first when it comes to interest rates dialing back their expectations on how far the central bank will be able to hike borrowing costs.
  • Investors are increasingly concerned that tightening monetary policy could derail the nascent economic recovery and the rapid spread of the omicron variant could complicate the Fed’s plans to hike rates.
     
One of the things about poker is that it isn’t always the player with the better hand who wins, but the one who doesn’t blink first.
 
And investors are betting that the U.S. Federal Reserve will blink first when it comes to interest rates dialing back their expectations on how far the central bank will be able to hike borrowing costs.
 
Interest rate futures show that money managers expect the Fed’s overnight rate to rise to just 1.27% by the end of 2023 a full 0.11% below the 1.38% implied by the Fed’s so-called dot plot.
 
That divergence between what traders think the Fed will do and what the central bank thinks it can do underlines the uncertainty investors have about the prospects for the U.S. economy in the years ahead, as well as just how aggressively policymakers will need to act to reign in inflation.
 
Investors are increasingly concerned that tightening monetary policy could derail the nascent economic recovery and the rapid spread of the omicron variant could complicate the Fed’s plans to hike rates.
 
Making matters worse, U.S. senator Joe Manchin, has derailed the Biden administration’s massive US$1.75 trillion Build Back Better bill, with provisions for infrastructure spending that would have helped to provide jobs in the labor-intensive construction industry and spurred renewal in America’s hollowed-out industrial cities.
 
And that’s not even addressing the elephant in the room – that if the Fed were to hike rates by three or four times next year, it would be out of sync with the European Central Bank, which  remains resolved to stay the course – ruling out the possibility of raising rates in 2022 despite higher inflation.
 
Ultimately it could be the Fed that blinks first and if so, it wouldn’t be the first time.
 
In 2018, the Fed warned that markets should prepare for a greater than expected increase in interest rates, only to see markets tank and the central bank reverse its course to cut rates ever since.
 
Perhaps investors have a stronger hand than the Fed knows about.
 

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

 

 

 

3. Bitcoin Barrels Towards 2022 Below US$46,000

 
  • Bitcoin, which had been trending downwards for the most part of last week dipped below US$46,000 yesterday and is now a full third off its all-time-high clocked in early November.
  • Whereas bitcoin may have stared the year with 70% dominance, it has since seen that lead dwindle to just 40%.
 
With less than two weeks left before the end of 2021, bitcoin lies in the Goldilocks zone, not quite at the bullish forecasts of US$100,000, but also nowhere close to zero or capitulation, despite waning risk sentiment.
 
Global financial markets are being whipsawed by a variety of factors, from tightening monetary policy, to evidence that the omicron coronavirus variant is both more virulent and potentially just as deadly as any other mutation before it.
 
Against this backdrop, bitcoin, which had been trending downwards for the most part of last week dipped below US$46,000 yesterday and is now a full third off its all-time-high clocked in early November.
 
Policymakers are prioritizing the fight against inflation by tightening monetary conditions despite signs that the omicron variant could derail the economic recovery.
 
Making matters worse, Democratic Senator Joe Manchin has put the kybosh on the Biden administration’s US$1.75 trillion spending bill, which might have fed into risk sentiment with fiscal stimulus just as monetary stimulus threatens to be withdrawn.
 
The volatility and risk-off sentiment is forcing investors to take a long hard look at whether risk assets from cryptocurrencies to technology shares may be due for a rougher patch after surging from pandemic lows.
 
But there are also some technical factors for chart watchers which could portend a change of fortune for bitcoin, with the benchmark cryptocurrency sitting at its 55-week moving average, a level which bitcoin has typically bounced higher from in the past.
 
And regardless of sentiment, cryptocurrencies as a whole can pat themselves on the back for a breakout year which saw some US$1.5 trillion in market cap added.
 
Despite the correction from its all-time-high, bitcoin is still up over 60% this year and its share of total market cap has fallen dramatically, suggesting that investors are looking beyond the basic bitcoin to bolster their cryptocurrency portfolios.
 
Whereas bitcoin may have stared the year with 70% dominance, it has since seen that lead dwindle to just 40%.
 
 

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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 21, 2021

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