Start Investing

Novum Alpha - Daily Analysis 13 January 2022 (10-Minute Read)

A terrific Thursday as shares continue to trend upwards on expectations that the Fed may not be as hawkish as would first appear and in light of CPI data that was well within expectations.

 

In brief (TL:DR)

 
  • U.S. stocks rose Wednesday with the Dow Jones Industrial Average (+0.11%), the S&P 500 (+0.28%) and the Nasdaq Composite (+0.23%) all up as inflation data was within estimates. 
  • Asian stocks were mixed Thursday after a U.S. inflation print intensified calls for interest-rate increases as soon as March. 
  • Benchmark U.S. 10-year Treasury yields rose one basis point to 1.75% (yields rise when bond prices fall).
  • The dollar slightly pared a drop.
  • Oil held an advance on signs of tighter supply with February 2022 contracts for WTI Crude Oil (Nymex) (-0.07%) at US$82.58.
  • Gold edged lower with February 2022 contracts for Gold (Comex) (-0.14%) at US$1,824.70.
  • Bitcoin (+2.27%) rose to US$43,607 as inflation numbers rekindled the debate about whether the cryptocurrency is a hedge against rising consumer prices. 
 

In today's issue...

 
  1. Didi Chuxing Faces Roadblock in Hong Kong Relisting
  2. U.S. Inflation Soars to 7%, Is It Time to Panic Yet?
  3. Bitcoin Rebounds to US$44,000 on U.S. Inflation Data
 

Market Overview

 
The U.S. inflation read came after U.S. Federal Reserve Chairman Jerome Powell vowed to contain the worst price pressures in four decades without derailing the economic recovery from the pandemic.
 
In remarks prepared for a confirmation hearing before the Senate Banking Committee, U.S. Federal Reserve Vice Chairman Lael Brainard said tackling inflation and getting it back down to 2% while sustaining an inclusive recovery is the U.S. central bank’s most pressing task.
 
In Asia, markets were mixed Thursday morning with Tokyo's Nikkei 225 (-0.86%) and Seoul's Kospi Index (-0.42%) down, while Hong Kong's Hang Seng (+0.31%) and Sydney’s ASX 200 (+0.36%) were up. 
 
 

1. Didi Chuxing Faces Roadblock in Hong Kong Relisting

 
  • A listing in Hong Kong is imperative now for Didi Chuxing, as it will soon start the delisting of its American depository receipts in a one-for-one swap with Hong Kong shares.
  • But there are signs that a Hong Kong listing isn’t as straightforward as one would imagine and could in fact take a relatively long time to arrange, with the unresolved government investigation into Didi Chuxing and permit issues in China potential stumbling blocks to a relisting.
     
The road to listing any company on the prestigious NASDAQ exchange is fraught with challenges and pitfalls, but imagine getting to the goal, only to have to pack up and relist somewhere else – that requires true grit and determination.
 
And that necessary tenacity is on full display as Chinese ride-hailing app Didi Chuxing navigates the mine-filled waters as it attempts to float back to Hong Kong, its flagship badly battered from a disastrous IPO in New York.
 
Beijing effectively decimated Didi Chuxing’s ride-hailing business upon its U.S. listing, ordering its apps to be deleted from Chinese app stores and launching investigations into how it handles data, sending its market value plummeting by as much as US$40 billion.
 
A listing in Hong Kong is imperative now for Didi Chuxing, as it will soon start the delisting of its American depository receipts in a one-for-one swap with Hong Kong shares.
 
But there are signs that a Hong Kong listing isn’t as straightforward as one would imagine and could in fact take a relatively long time to arrange, with the unresolved government investigation into Didi Chuxing and permit issues in China potential stumbling blocks to a relisting.
 
A formal end to the investigation and a return of its apps to Chinese stores are essential for a listing in Hong Kong and even then, it’s not entirely clear if the business is sustainable or satisfies Hong Kong’s exchange rules.
 
Since Beijing’s crackdown, Didi Chuxing has burned through some US$7.6 billion for the first three quarters of 2021 and is on track to run out of cash by the middle of next year.
 
And in the meantime, Didi Chuxing’s competitors have taken the opportunity to win over market share while the former ride-hailing giant has been sitting it out.
 
HKEX’s review process also includes a somewhat opaque “suitability” requirement which assesses whether companies are compliant with regulations, which is why it’s re-listing in Hong Kong isn’t a given.
 
In some parts of China, it’s been reported that Didi Chuxing had been operating illegally, without the necessary required permits.
 
But Didi Chuxing’s troubles in moving to Hong Kong may not be specific to the ride-hailing app alone – dozens of other Chinese companies which are set to head closer to home may face the same regulatory issues.
 
Many Chinese tech companies had used the gray vehicles of variable interest entities or VIEs to list shares of their companies on American exchanges, and as internet regulation and data handling become bigger issues in China, may face the same problems when they attempt a relist in Hong Kong.
 
 

2. U.S. Inflation Soars to 7%, Is It Time to Panic Yet?

 
  • CPI increased at a 7% year-on-year pace in December, a step up from the 6.8% registered in November and the largest jump in forty years.
  • Investors have interpreted Powell’s remarks as suggesting that the Fed would still adopt a growth mindset, with inflation being something that needs to be tackled with as required.
     
U.S. Consumer Price Index or CPI data revealed that prices surged yesterday at their fastest pace in almost four decades.
 
CPI increased at a 7% year-on-year pace in December, a step up from the 6.8% registered in November and the largest jump in forty years.
 
Although the annual pace of price increases quickened, the month-on-month gains moderated to just 0.5% from November to December, down from the 0.8% for the previous period, according to CPI data from the U.S. Bureau of Labor Statistics.
 
But filtering through the CPI data reveals that all is not lost in the battle against rising prices.
 
Some of the largest contributors to December’s price increases were for used car prices, apparel, household furnishings and medical care – all symptoms of ongoing global supply chain issues.
 
Significantly, genuine cost of living price increases moderated, including food, thanks to a slowdown in meat price rises and fuel, as oil prices dipped.
 
And other areas where expenses increased could also be attributed to the ongoing pandemic and labor shortage thanks to the surge in the omicron variant, with eating out costing diners 6% more last year compared to a year ago.
 
The mixed data gave investors food for thought and appear to indicate a potential plateauing of price increases as being subject to general economic conditions, as opposed to purely as a result of monetary policy.
 
Given that many of the price increases can be attributed to supply chain constraints, including for used cars as new car production stalled due to a global shortage of chips, the slowdown in increases in the price of food and fuel should bring some comfort.
 
The items in the CPI where the rate of price increases is continuing to accelerate don’t appear to be those which would entrench inflation, but more a consequence of supply chain disruptions, which can be expected to worsen in the coming months.
 
Fresh outbreaks of the omicron variant are occurring at many key industrial ports and cities in China and Beijing’s zero-Covid policies are putting a strain on manufacturing and shipping.
 
Meanwhile, the Biden administration is doing what it can to breakup bottlenecks at key ports, crackdown on anti-competitive behavior in certain markets such as the meat industry and encouraging more oil production globally to reduce gasoline prices.
 
So far, it appears that the Biden administration is making some headway, especially as the pace of meat and fuel price increases appears to be slowing.
 
And while the Fed will no doubt be under pressure to increase interest rates sooner rather than later, comments from U.S. Federal Reserve Chairman Jerome Powell at his confirmation hearing before the Senate appear to suggest the outlook for investors may be more sanguine.
 
At his Senate confirmation hearing, Powell said,
 
“We will use our tools to support the economy and a strong labor market and to prevent higher inflation from becoming entrenched.”
 
Investors have interpreted Powell’s remarks as suggesting that the Fed would still adopt a growth mindset, with inflation being something that needs to be tackled with as required.
 
These remarks, combined with inflation data that doesn’t appear to show runaway price pressures may yet put a cap on the number of interest rate hikes that the market appears to be preparing for.
 
Find out more about Novum Alpha as leading luxury portal Luxuo.com interviews our CEO & General Counsel, Patrick Tan...

 

 

3. Bitcoin Rebounds to US$44,000 on U.S. Inflation Data

 
  • Some analysts put the sharp recovery in bitcoin down to U.S. CPI data and the role of the cryptocurrency as a potential hedge against inflation.
  • That inflation was more or less in line and perhaps the Fed doesn’t need to accelerate tightening could provide a more optimistic outlook for cryptocurrencies.
 
The debate on whether bitcoin is a hedge against inflation or a volatile risk asset rages on and yesterday, bitcoin soared past US$44,000 for the first time in a week, even as it now trades around US$43,500 (at the time of writing).
 
Some analysts put the sharp recovery in bitcoin down to U.S. CPI data and the role of the cryptocurrency as a potential hedge against inflation.
 
Others point to comments from U.S. Federal Reserve Chairman Jerome Powell at his Senate confirmation hearing that appear to reflect a central bank still focused on growth and unemployment, dealing with inflation as needed to the cause for bitcoin’s rebound.
 
Although Consumer Price Index data rose at its fastest pace annually in forty years, a closer examination of the components of price increases suggests that they are due materially to supply chain disruptions or pandemic pressures, feeding into the prospect that inflation may (gasp) actually be “transitory” (to borrow a term discarded by the Fed).
 
That inflation was more or less in line and perhaps the Fed doesn’t need to accelerate tightening could provide a more optimistic outlook for cryptocurrencies.
 
Although bitcoin maximalists have long touted the inflation-hedging chops of the cryptocurrency, on account of their being an idiosyncratic asset class, there just isn’t enough data, nor does it go back long enough to make that determination.
 
While only 21 million bitcoin will ever be created, that bitcoin is deflationary in and of itself doesn’t necessarily contribute significantly to its role as an inflation hedge – it’s whether or not investors agree on it fulfilling that role that matters.
 
If nothing else, the prospect that the Fed won’t be as aggressive in its tightening, especially on a qualitative examination of CPI data that is well within expectations and not worse, is probably a stronger driver of investors into risk assets like cryptocurrencies.
 
For now, retail flows into bitcoin, according to data from Glassnode, hasn’t accelerated, although institutional investors appear to have been buying the dip. 
 
 

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 13, 2022

Get the Novum Alpha newsletter delivered to your inbox daily


Important Risk Information



The information provided on this site is for informational purposes only. It is not to be construed as investment advice or a recommendation or offer to buy or sell any security. Prospective clients should always obtain and read an up-to-date product and/or services description or prospectus before deciding whether to invest. Any views expressed herein are those of Novum Alpha SPC (“the Company”) are based on available information, and are subject to change without notice. There are no guarantees regarding the achievement of investment objectives, target returns, or measurements such as alpha, tracking error, asset weightings and other information ratios. The views and strategies described may not be suitable for all clients. The Company does not provide tax or legal advice. Prospective subscribers should consult with a tax or legal advisor before making any investment decision. Investing in any investment product entails risks and there can be no assurance that the Company avoid incurring losses or achieve any of a prospective subscriber’s investment goals.


Performance quoted represents past performance, which is no guarantee of future results. Investment and principal value will fluctuate, so you may have a gain or loss when assets are sold. Current performance may be higher or lower than that quoted product’s expenses and other liabilities, and such product may be unable to meet its investment objective