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Novum Alpha - Daily Analysis 7 January 2022 (10-Minute Read)

The key takeaway from the U.S. Jobs Report on Friday is that unemployment is going down and wages are heading up - or at least that's how market participants are interpreting the data. Bets that the U.S. Federal Reserve will hike rates as soon as March are increasing, despite signs that the omicron variant is putting increased pressure on healthcare infrastructure and job growth in the U.S. is slowing. 

A wonderful weekend to you as equities continue to struggle on the prospect of tighter monetary policy. 
 

In brief (TL:DR)

 
  • U.S. stocks continued their slide into the weekend with the Dow Jones Industrial Average (-0.01%), the S&P 500 (-0.41%) and the Nasdaq Composite (-0.96%) all in the red as inflation and interest rates weigh on sentiment. 
  • Asian stocks closed mixed on Friday as U.S. jobs data saw job growth far off estimates but with unemployment continuing to decline. 
  • Benchmark U.S. 10-year Treasury yields soared to 1.767% (yields rise when bond prices fall) as traders rotated out of Treasuries and into commodities and value stocks.
  • The dollar held losses. 
  • Oil slipped on profit taking with February 2022 contracts for WTI Crude Oil (Nymex) (-0.70%) at US$78.90.
  • Gold rose with February 2022 contracts for Gold (Comex) (+0.46%) at US$1,797.40 in line with inflation expectations. 
  • Bitcoin (+0.50%) was flat into the weekend at US$42,000, on lower volumes and insufficient factors to take the benchmark cryptocurrency in either direction, given that many traders have turned to "hodlers" overnight. 

In today's issue...

 
  1. U.S. Unemployment Falls to Set Stage for Rate Hikes
  2. The Great Stock Market Rotation - How Long Will it Last?
  3. U.S. Crypto Exchange Volumes Fall Alongside Prices

 

 

Market Overview

 
The key takeaway from the U.S. Jobs Report on Friday is that unemployment is going down and wages are heading up - or at least that's how market participants are interpreting the data. 
 
Bets that the U.S. Federal Reserve will hike rates as soon as March are increasing, despite signs that the omicron variant is putting increased pressure on healthcare infrastructure and job growth in the U.S. is slowing. 
 
Nevertheless, a "great rotation" to value stocks is occurring, with investors snapping up shares of "cheap" companies in financials, materials and energy, while shunning high-growth tech stocks - the durability of this shift however is uncertain, as it's happened before, only to be taken down by virus variants. 
 
In Asia, markets were mostly higher on Friday with Tokyo's Nikkei 225 (-0.03%) down marginally, while Sydney’s ASX 200 (+1.29%), Seoul's Kospi Index (+1.18%) and Hong Kong's Hang Seng (+1.82%) were all higher at the close. 
 

 

1. U.S. Unemployment Falls to Set Stage for Rate Hikes

 
  • U.S. jobs data saw job growth at less than half of estimates, but overall unemployment was lower
  • Higher wages could provide the impetus for the Fed to raise rates as soon as March to tackle persistent inflationary pressures 
     
Just because you can, doesn’t mean you should – or at least that’s what investors into some of the most highly valued tech stocks may be hoping when it comes to the U.S. Federal Reserve’s prospective interest rate hikes.
 
Markets have been nothing but a sea of red, outside of the long-suffering “value” sectors of financials, materials and energy and news that unemployment in the U.S. is falling won’t make matters any better.
 
The prospect that the Fed may usher in a period of more normal monetary policy has traders betting against previously favored tech trades and rotating into value stocks, while cryptocurrencies and Treasuries are languishing.
 
A majority of economists and investors now expect the Fed to press ahead with plans to tighten monetary policy, even though December jobs growth fell unexpectedly and dramatically with just 199,000 new jobs added, a decline from the 249,000 in November and well off estimates of 444,000.
 
Despite the slowing job growth, investors appear (for now) to be fixated on the unemployment rate which has since ebbed to 3.9% putting it within a touch of the pre-pandemic normal of 3.5%.
 
Wages are also increasing, which many expect that the Fed will factor into inflationary pressures when deciding on its monetary policy and has added to a selloff in Treasuries as traders are increasingly confident the Fed will almost certainly raise rates this quarter.
 
And that has seen investors dump fast-growing tech companies that have always been viewed as the most vulnerable to rate rises.
 
The Fed is under pressure to tame soaring inflation, which has seen headline prices rise by over 5% for six consecutive months and inflation at the highest level in roughly four decades.
 
U.S. Federal Reserve Chairman Jerome Powell has said that the central bank will be watching wage growth closely for further evidence that inflation could morph into a more persistent problem and that may explain why traders are betting on a rate hike as soon as March. 
 

 

2. The Great Stock Market Rotation - How Long Will it Last?

 
  • Value strategy revival has seen investors rotate from pricey tech stocks into financials, materials and energy 
  • Long term outlook for value strategy less clear as structural limitation to a growth-biased investment approach may mean that the rally could be short-lived 
     
For value investors who have long rued developments from the meme stock frenzy to the eye-watering valuations of unprofitable tech firms, the first week of 2022 must have tasted like sweet justice.
 
The biggest win for the value strategy since March 2020, when the pandemic all but tanked every available market, has seen a wild stock rotation that seems achingly similar to the one that gripped markets just a year earlier.
 
But the cause for value investors to cheer isn’t a new crisis created from the coronavirus, instead it’s one of the U.S. Federal Reserve’s own manufacture, apparently hellbent on taming the fastest inflation in the U.S. in four decades.
 
With the Fed’s last meeting minutes being deciphered in excruciating detail, investors are now convinced that the central bank’s plan to accelerate tightening of monetary policy has seen everything from bond yields to tech stocks tank, while value stocks in sectors such as energy, financials and materials, have soared.
 
But not all value investors are taking the opportunity to celebrate just yet, as what’s happened this past week is similar to moves in early 2021, only to fade as the pandemic revival drove bond yields down, and the meme stock craze got under way.
 
Historically low inflation-adjusted yields and the spreading omicron variant, as well as the allure of tech visions from the metaverse to electric cars could yet disappoint proponent of cheap shares.
 
Nonetheless, confidence is growing that this time, the turn of value investors is here to stay with hedge funds (the so-called “smart money”) upping exposure to value stocks at the highest rate in four years.
 
Rising rates against a backdrop of strong economic growth typically drives investors toward value stocks, which tend to be more cyclical but nonetheless offer near-term cashflows.
 
But given a finite amount of flows, money pouring into value stocks has to come from somewhere, and for now that appears to be frothy tech firms, especially when the long-term earnings potential of high growth tech companies become less appealing when inflation starts to bite.
 
Towards the end of last year, real yields remained stubbornly low, even as the Fed explicitly communicated its tightening plans, but have since risen every day of the past week and why hedge funds have been dumping tech to load up on cheap shares.
 
But there is a reason why value stocks are cheap at the moment – their prospects are somewhat predictable – whereas tech stocks may have surprises in store.
 
Take for instance electric vehicle maker Tesla (-3.54%), which smashed all previous production records and analyst estimates for vehicle deliveries in the last quarter of 2021, its shares surged at the start of the week, only to be taken down together with waning appetite for high growth companies.
 
Last year’s reversal however should still provide value investors with some food for though – when bonds rallied amid persistent virus concerns, value strategies slumped.
 
In much of the post-crisis era, investors have constantly debated whether value strategies are structurally impaired by technological transformation that inherently favors a “growth” mindset towards investing. 
 

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

 

 

3. U.S. Crypto Exchange Volumes Fall Alongside Prices

 
  • Cryptocurrency exchanges are the most battered alongside the recent fall in digital asset prices as trading volumes fall off as well 
  • Traders are sitting on the sidelines either way, with buying activity keeping the support of US$40,000 intact for now, but without any major catalyst to see a fresh uptick 
 
Unlike the traditional financial markets, a sharp drop off in volume on cryptocurrency exchanges can mean that investors have suddenly turned to “hodling” instead of trading and while this may mean bad news for exchanges which make fees from trading activity, it could provide a silver lining for long-term cryptocurrency enthusiasts who believe that even more upside awaits.
 
Volatility in cryptocurrencies is nothing new, prices can move for apparently arbitrary reasons, as plentiful as the tokens that there are to take bets on.
 
But the recent sharp correction in cryptocurrency prices, thanks to an apparent hawkish turn by the U.S. Federal Reserve may have more investors looking to shy away from trading, and going back to one of the fundamental tenets of the sector – to “hodl” (or “hold”).
 
FTX.US has reported lower trading volumes “across the board” in the past week.
 
In an interview with Bloomberg, FTX.US President Brett Harrison noted,
 
“To me it looks like we’re in the period of just decreased volume and subdued trading activity following drops in general.”
 
“Usually you will see a lot of quick volume from people trying to sell off during a panic, but then a longer period of decreased volume as people shy away from the market after the volatility.”
 
The quiet seen across cryptocurrency exchanges right now is a factor of no new money coming in, but also, no old money going out.
 
In a typical crash scenario, investors would keep pouring into exchanges, eager to find an exit to cash out of the ecosystem altogether, but given that bitcoin refuses to give up the US$40,000 level of support (at the time of writing) appears to suggest that buyers exist at certain levels, while sellers have shifted their assets into cold wallets.
 
The cryptocurrency industry participants that will be hit the hardest by a sharp dropoff in volumes will ultimately be exchanges such as Coinbase Global (-0.71%), where trading fees make up the majority of its revenue.
 
Prices turning flat could also be a double whammy for exchanges – when prices turn flat, they’re not so low as to tempt in new buyers, but they’re not so high to entice hodlers to cash out either.
 
 
 

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 fourth month of trading has beaten the benchmark in December, with a marked-to-market loss of -15.68% versus -22.55% for the Bloomberg Galaxy Crypto Index and topping off a year which saw +4.19% in November, +13.22% in October and +2.19% 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.  
 
 
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Jan 08, 2022

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