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

A magnificent Monday to you as investors sit mostly on the sidelines with bond market volatility likely to keep risk sentiment off in the immediate term.

 

In brief (TL:DR)

 
  • U.S. stocks ended lower last Friday 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 the prospect of a tightening Fed looms. 
  • Asian stocks traded cautiously Monday as investors brace for bond-market volatility and assess the economic hit from the rapidly spreading Covid-19 omicron variant.
  • Benchmark U.S. 10-year Treasury yields soared to 1.767% last Friday (yields rise when bond prices fall) as traders interpreted the latest U.S. job numbers to provide sufficient leverage for the Fed to focus on inflation.  
  • The dollar was steady.
  • Oil rose slightly with February 2022 contracts for WTI Crude Oil (Nymex) (+0.13%) at US$79.00.
  • Gold inched lower with February 2022 contracts for Gold (Comex) (-0.27%) at US$1,792.60.
  • Bitcoin (-0.30%) was more or less flat at US$41,972, with the support at US$40,000 still appearing to hold for now. 
 

In today's issue...

 
  1. Wall Street’s Banks Cash In on a Bumper 2021
  2. Economists Have Penciled In 2022’s Rate Rises
  3. Ethereum will Endure Challengers
 

Market Overview

 
Markets face increasing volatility as investors grapple with how to reprice assets as the pandemic liquidity that helped drive equities to record highs is withdrawn.
 
At the same time, the spread of omicron is posing a fresh test for economic activity.
 
U.S. inflation data this week will be keenly watched as concerns grow the Fed is behind the curve in tackling elevated price pressures.
 
In Asia, markets were mixed on Monday with Sydney’s ASX 200 (-0.30%) and Seoul's Kospi Index (-1.28%) down, while Hong Kong's Hang Seng (+0.96%) was up while Tokyo's Nikkei 225 closed.
 
 

1. Wall Street's Banks Cash In on a Bumper 2021

 
  • Wall Street’s biggest banks this month are set to report record profits for 2021 thanks to bumper investment banking fees and lower-than-expected losses on loans during the pandemic.
  • U.S. bank stocks soared by over a third in 2021, and sentiment is still bullish on expectations that rate rises will resuscitate earnings that banks make from loans, especially as federal support and stimulus policies eventually peter out.
     
Given how the U.S. Federal Reserve ensured that few (if any) loans went sour in 2021 and the incredible run up in equity prices, Wall Street’s biggest banks have had an amazing past year.
 
Almost as if right on schedule, the prospect of higher interest rates and a rotation out of “risky” high-growth tech stocks into value stocks including financials, is also feeding into the investment case for banks like Goldman Sachs (+0.14%), JPMorgan Chase (+0.97%), Citigroup (+1.32%), Morgan Stanley (+0.63%) and Bank of America (+2.18%).
 
Whilst it may still be too early to say if the value rotation is likely to be durable, investors are already starting to price in Wall Street’s biggest banks reporting record profits for the final quarter of 2021 as reporting season gets under way.
 
Key dates to look out for reporting (all dates are U.S. Eastern Time):
 
  • Citigroup – 14 January 2022
  • JPMorgan Chase – 14 January 2022
  • Goldman Sachs – 18 January 2022
  • Morgan Stanley – 19 January 2022
  • Bank of America – 19 January 2022
 
The first up this week Citigroup, has analysts forecasting the highest ever full-year profits, according to estimates and historical earnings data from S&P Capital IQ.
 
And the prospect of interest rate hikes (now pipped at three in total for this year) is feeding into optimism that Wall Street’s banks could be set for another strong year, albeit not as stellar as 2021.
 
Part of the reason for banks to have had such a strong 2021 despite the pandemic was that provisions that had been set aside to cover potential loan losses proved less needed than initially feared, while investment banking fees soared amidst a raft of mergers and acquisitions as well as SPACs and initial public offerings.
 
U.S. bank stocks soared by over a third in 2021, and sentiment is still bullish on expectations that rate rises will resuscitate earnings that banks make from loans, especially as federal support and stimulus policies eventually peter out.
 
 

2. Economists Have Penciled in 2022's Rate Rises

 
  • Economists largely believe that the Fed is likely to remain on track to raise interest rates as early as March, but Friday’s hobs report showed a sharp slowdown in the number of new jobs created in December, data that policymakers didn’t have at the time.
  • It’s unlikely the Fed will speed up the tapering of its asset purchases this month, because the slowdown in jobs growth will almost certainly weigh on policymakers decision-making matrix.
     
The past week is probably one that Cathie Wood of Ark Investment Management would prefer to forget.
 
Down some 46% from its peak, Wood’s flagship ARKK which invests in the darlings of the pandemic – high-powered growth stocks in businesses ranging from biotechnology to cryptocurrency exchanges has not had a good start to 2022.
 
And if economists are anything to go by, many of the sectors favored by investors in 2021 may have a challenging year ahead – or will they?
 
While the minutes of December’s Federal Open Market Committee meeting reveal a central bank that is bent on reigning in the highest inflation in almost four decades, Friday’s U.S. jobs report may provide investors with some additional food for thought.
 
Economists largely believe that the Fed is likely to remain on track to raise interest rates as early as March, but Friday’s hobs report showed a sharp slowdown in the number of new jobs created in December, data that policymakers didn’t have at the time.
 
Just 199,000 new jobs were created last month, less than half the number most economists had projected and well below the monthly average of 537,000 in 2021.
 
The biggest question that investors need to ask themselves at this stage is whether they think that the Fed will be more concerned about inflation, or job growth and the majority of economists are betting that it will be price pressures that ultimately win out.
 
Declining unemployment, which fell to 3.9% in December, close to the pre-pandemic level of 3.5% and a rise in wage gains all appear to point to a tighter labor market, which economists are expecting will embolden the Fed to lift off rates in March.
 
But the FOMC also projected that unemployment would fall to 3.5% by the end of last year, and will likely need to revisit those projections now that the data shows the pace of unemployment declines appears to be slowing, clocking in at just 3.9%.
 
Labor participation in the U.S. has also returned to 61.9%, just shy of the 63% registered at the onset of the pandemic, even though there are still 3.6 million fewer people in jobs compared to when the virus first started to spread.
 
These metrics are leading economists to believe that the Fed’s policymakers are likely to be willing to look past weaker labor force participation because inflation is the dominant concern now.
 
There is reason enough to believe that this Fed is relatively consistent in doing what it says – so far, U.S. Federal Reserve Chairman Jerome Powell has been crystal clear in communicating intentions and rate plots to the market, to avoid the “taper tantrum” of 2015 by predecessor Ben Bernanke.
 
And while Powell has “retired” the use of terms such as “transitory” to describe inflation, what he hasn’t yet committed to, is a lifting of rates as soon as March.
 
If nothing else, Powell has maintained that flexibility is key to the Fed’s policymaking.
 
In December’s press conference Powell did say that the FOMC expects inflation to normalize by the end of this 2022, with the median projection at 2.6%, hardly the stuff of nightmares.
 
Significantly, Powell said in December,
 
“We will be watching carefully to see whether the economy is evolving in line with expectations.”
 
And therein lies the clue as to what to expect next – the entire point of winding down asset purchases is to provide policymakers with the flexibility to respond as the circumstances dictate.
 
It’s unlikely the Fed will speed up the tapering of its asset purchases this month, because the slowdown in jobs growth will almost certainly weigh on policymakers decision-making matrix.
 
Given how a sudden withdrawal of asset purchases could cause a sharp market correction, this Fed is likely to want to ease out of the liquidity pool, instead of jumping out altogether.
 
In which case, much will depend on the circumstances – sluggish jobs growth may cause the Fed to be more circumspect on tightening, and the progress of the pandemic will also affect whether the Fed is being premature in lifting off altogether.
 

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

 

 

 

3. Ethereum will Endure Challengers

 
  • The list of challengers to Ethereum’s dominance in the decentralized finance or DeFi space as well as its use in smart contracts, is long.
  • More significantly however, Ethereum was able to achieve something that is often impossible in the cryptosphere – consensus.
 
Solana, Polygon, Polkadot, even Binance Smart Chain – the list of challengers to Ethereum’s dominance in the decentralized finance or DeFi space as well as its use in smart contracts, is long.
 
But these “pretenders to the throne” are unlikely to undermine the incumbency of Ethereum, or at least that’s what Joey Krug, co-Chief Investment Officer at digital asset management firm Pantera Capital believes.
 
In an interview with Bloomberg, Krug noted,
 
“If you roll the clock forward 10 to 20 years, a very sizable percent, maybe even north of 50%, of the world’s financial transactions in some way, shape or form will touch Ethereum.”
 
Krug revealed that ether, the cryptocurrency that sits atop Ethereum’s blockchain, sits among Pantera Capital Management’s top three positions across funds, which ranks in the top five of cryptocurrency funds with over US$5.8 billion in assets under management.
 
And while Ethereum’s critics claim that the network is mired by expensive fees and slow transaction speeds as it becomes the victim of its own popularity, it still remains the blockchain of choice because of its incumbency.
 
Many developers already familiar with JavaScript, a popular high level programing language, took to Ethereum’s Solidity like ducks to water and layer-2 networks, where transactions are bunched and only uploaded to the blockchain as required, are evolving to address scaling issues.
 
Those factors have helped ether to deliver almost 400% in 2021 and has rekindled speculation that the cryptocurrency could one day surpass bitcoin, which currently has around double the market cap of ether.
 
More significantly however, Ethereum was able to achieve something that is often impossible in the cryptosphere – consensus.
 
The move to shift ether towards a deflationary cryptocurrency and the London hard fork, are all symbolic of a blockchain where stakeholders are willing to work together for the greater good and longevity of the network.
 
Whereas Bitcoin’s earliest days were mired with disputes and hard forks, over things as seemingly banal as an increase in block size, Ethereum’s proponents and participants have thus far managed to get on with the business of blockchain.
 
Krug of Pantera Capital and an early DeFi developer believes that challengers will eventually rely on Ethereum as a base, assuming that the blockchain successfully switches to a proof-of-stake system, which would help lay to rest allegations that cryptocurrency mining wastes energy.
 
According to Krug,
 
“There’s too many trade-offs other chains are making that Ethereum is not making on the decentralization side that are pretty important. I don’t know if they’re best suited to be the new global financial settlement layer.”
 
 

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.  

Jan 10, 2022

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