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Novum Alpha - Daily Analysis 11 January 2022 (10-Minute Read)

Investors are mulling the impact of a withdrawal of unprecedented stimulus and the spread of the omicron variant that continues to stress already buckling supply chains and add to inflationary pressures.

 
A terrific Tuesday to you as tech stocks make a comeback both in the U.S. and China. 
 

In brief (TL:DR)

 
  • U.S. stocks ended Monday with the Dow Jones Industrial Average (-0.45%) and the S&P 500 (-0.14%) down, while the Nasdaq Composite (+0.05%) was up slightly, in a late reversal that has seen the potential U.S. Federal Reserve policy tightening deliver more twists and turns than a daytime soap opera. 
  • Asian stocks fluctuated Tuesday ahead of a key inflation data from the U.S. that’s expected to strengthen the case for tighter monetary policy.
  • Benchmark U.S. 10-year Treasury yields were stable at 1.75% (yields rise when bond prices fall).
  • The dollar slipped.
  • Oil edged up with February 2022 contracts for WTI Crude Oil (Nymex) (+0.79%) at US$78.85.
  • Gold rose with February 2022 contracts for Gold (Comex) (+0.42%) at US$1,806.40.
  • Bitcoin (+0.48%) recovered to US$42,174 after dipping below $40,000, putting it on track for its worst start to a year since the earliest days of digital currencies.
 

In today's issue...

 
  1. Beijing Helps Chinese Tech Stocks Rebound
  2. Will U.S. Inflation Data Hit Another 40-Year High?
  3. Bitcoin Off to Worst Annual Start Ever Even as Analysts Predict US$100,000 Price
 

Market Overview

 
Investors are mulling the impact of a withdrawal of unprecedented stimulus and the spread of the omicron variant that continues to stress already buckling supply chains and add to inflationary pressures.
 
A drop in liquidity has sparked a rotation out of pricey growth stocks into laggard value names, but it is too early to tell if the shift is durable.
 
A key measure of U.S. inflation set to be released Wednesday is anticipated to have increased further in December, putting additional pressure on the central bank to tighten policy.
 
In Asia, markets fluctuated Tuesday with Sydney’s ASX 200 (-0.54%), Seoul's Kospi Index (-0.08%) and Tokyo's Nikkei 225 (-0.87%) down, while Hong Kong's Hang Seng (+0.36%) was up in the morning trading session, helped in large part by Chinese tech.
 
 

1. Beijing Helps Chinese Tech Stocks Rebound

 
  • Chinese tech stocks, which have underperformed their U.S. counterparts into this year, have made up some lost ground, as U.S. tech shares continued to be hammered on the prospect of a more hawkish Fed.
  • Nevertheless, U.S. inflation figures due out on Wednesday could have an impact on the appetite for Chinese tech shares.
     
The Hong Kong Hang Seng Tech index was the standout in a sea of red yesterday as Chinese tech stocks rallied after starting the year with a week of sharp falls, even as markets across Asia Pacific were mixed with investors mulling a U.S. Federal Reserve rate hike.
 
Interest rate hikes by the Fed could affect Asia Pacific markets in several ways, higher yields will see investors looking for haven assets put demand on Treasuries and the dollar, but a stronger dollar will also see American investors looking for opportunities offshore as well.
 
Chinese tech stocks, which have underperformed their U.S. counterparts into this year, have made up some lost ground, as U.S. tech shares continued to be hammered on the prospect of a more hawkish Fed.
 
But even after Monday’s gains for Chinese tech, Shanghai’s Star 50, an index of Shanghai-listed tech stocks, remains down almost 6% this year, while the Nasdaq Composite has only shed 4.5%.
 
Beijing also appears to be changing its tact, with regulators promising supportive measures in a bid to calm markets with the Chairman of China’s securities regulator promising late last week to take “multiple measures to ensure smooth market operations and resolutely prevent large and sudden ups and downs.”
 
A more accommodative stance out of Beijing is tempting institutional investors, who had shunned Chinese tech amidst a regulatory crackdown last year that saw the shares of everything from delivery apps to afterschool education plunge, wading back into markets.
 
On Monday, global institutional investors and mainland Chinese traders were out in force, jumping into stocks such as Tencent (+1.63%) and Alibaba (-1.33%), searching out bargains.
 
Nevertheless, U.S. inflation figures due out on Wednesday could have an impact on the appetite for Chinese tech shares, with the likelihood that headline U.S. inflation would exceed 7.1%, the highest annual increase in four decades putting greater pressure on the Fed to hike rates.
 
 

2. Will U.S. Inflation Data Hit Another 40-Year High?

 
  • Nonetheless, wage growth has accelerated, and given the Fed’s laser-focus on inflation at the moment, is what investors are focusing on, to the detriment of risk assets.
  • Unlike in previous years, where the Fed was assuredly single-minded in its goal – to support the economy through the pandemic, every single FOMC meeting here on out will add to volatility, especially after March, when asset purchases are expected to draw to a close.
     
While last week’s release of the U.S. Federal Reserve Open Market Committee’s meeting minutes may have taken investors by surprise, revealing just how concerned policymakers are with respect to inflation, the data after that has been somewhat less clear cut.
 
U.S. jobs data released last Friday showed a U.S. labor force that was seeing a fall in unemployment to 3.9%, but the pace of jobs growth slowing, with only 199,000 new jobs added, instead of the 441,000 forecasted.
 
Nonetheless, wage growth has accelerated, and given the Fed’s laser-focus on inflation at the moment, is what investors are focusing on, to the detriment of risk assets.
 
On Wednesday, the U.S. Bureau of Labor Statistics will be releasing its Consumer Price Inflation data for December, which economists polled by FactSet are expecting to come in at 7.1% year-on-year, the highest pace of price rises in four decades.
 
Markets have thus far priced in far less accommodative policy from the Fed, but a last-minute rally yesterday in the tech-heavy Nasdaq Composite saw the index erase losses and post a 0.1% gain for the day.
 
But there’s an outside chance that inflation may be close to peaking, as the confluence of supply chain disruptions moderate and stimulus-driven demand fade, increasing the prospect that price increases will start to normalize in 2022.
 
That the Nasdaq Composite rallied late yesterday seems to suggest that the jury is still out on just how serious inflation pressures have become.
 
And to be sure, the Fed may have already achieved some of its goals purely through posturing and tapering its asset purchases, with tech stocks tumbling and prices declining across a range of risk assets, without so much as putting a finger to lifting rates.
 
Unlike in previous years, where the Fed was assuredly single-minded in its goal – to support the economy through the pandemic, every single FOMC meeting here on out will add to volatility, especially after March, when asset purchases are expected to draw to a close.
 

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

 

 

 

3. Bitcoin Off to Worst Annual Start Ever Even as Analyst Predict US$100,000 Price

 
  • The benchmark cryptocurrency is now down around 14% for the year (at the time of writing) and as the U.S. Federal Reserve turns hawkish, even more volatility can be expected.
  • Fortunately for bitcoin bulls, the all-important US$40,000 level of support, while tested, has proved sufficiently resilient, for now.
 
It’s been a heart-stopping 2022 so far for bitcoin investors.
 
Since hitting a high of almost US$69,000 last November, bitcoin is now off some 40% from that level, and dipped below US$40,000 albeit momentarily, over the past day.
 
The benchmark cryptocurrency is now down around 14% for the year (at the time of writing) and as the U.S. Federal Reserve turns hawkish, even more volatility can be expected.
 
Nevertheless, repeated attempts to declare bitcoin dead in the water have proved premature and while the road ahead may be rough, it is still up some 500% from before the pandemic.
 
To be sure, the pandemic has been a feather in bitcoin’s cap, with record amounts of central bank stimulus allowing cryptocurrencies to break into the mainstream as institutions and retail investors got involved in the ecosystem.
 
But now that the Fed has turned towards tightening monetary policy, whether the value proposition that is cryptocurrencies can be materialized in its price action will be tested.
 
Fortunately for bitcoin bulls, the all-important US$40,000 level of support, while tested, has proved sufficiently resilient, for now.
 
Being a good barometer for the current reduction in risk appetite, Bloomberg Intelligence’s Mike McGlone projects that bitcoin will nonetheless come out ahead as the world increasingly goes digital and the benchmark cryptocurrency becomes viewed as collateral.
 
Flows are also reflecting a shift between long term “hodlers” of bitcoin and cryptocurrencies and short-term traders, here for a quick flip, with evidence that bitcoin and cryptocurrency bulls have bought the dip.
 
And that may explain why Goldman Sachs is of the view that so long as bitcoin continues to take market share from gold as part of a broader adoption of digital assets, it could potentially hit US$100,000.
 
According to the venerable Wall Street institution, bitcoin’s float-adjusted market cap is just under US$700 billion, which accounts for just 20% of the “store of value” market which is believed to comprise both bitcoin and gold.
 
If bitcoin’s share of the store of value market were hypothetically to rise to 50% over the next 5 years, its price would increase to just over US$100,000, for a compound annualized return of around 17%, according to Zach Pandl, Co-Head of Global FX and EM strategy at Goldman Sachs.
 
Over longer time horizons, bitcoin’s performance is unparalleled – over 4,700% since 2016, and Pandl’s note suggests that despite the lack of ESG chops for bitcoin, it won’t stop demand for the asset, even if it may provide an obstacle to institutional adoption.
 
 

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 11, 2022

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