Novum Alpha - Daily Analysis 24 June 2022 (10-Minute Read)
A fantastic Friday to you as markets find their footing for the first time in weeks, boosted largely by renewed appetite for bonds keep a lid on yields.
In brief (TL:DR)
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In today's issue...
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Market OverviewIncreased global economic uncertainty is having an unexpected effect on demand for haven assets - with the prospect of rising interest rates likely to send yields northwards, investors are clamoring for bonds as risk assets have come under strain.
The irony is that by buying more bonds, investors are entering an increasingly crowded trade that is putting a lid on yields headed higher and boosting demand for stocks, especially tech.
Whether or not this virtuous cycle is durable is less certain.
Asian markets closed into the weekend higher with Tokyo's Nikkei 225 (+1.23%), Seoul's Kospi Index (+2.26%), Hong Kong's Hang Seng Index (+2.09%) and Sydney’s ASX 200 (+0.77%) all higher.
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Backtest returns are derived from live-traded proprietary capital but must be interpreted purely as a backtest and not inclusive of fees. The Novum Alpha All Weather Crypto Fund (“the Fund”) will be administered using investment policies, objectives, guidelines and restrictions that are in all material respects equivalent to those used when proprietary capital had been traded. However, because the trading using the proprietary capital was not via a registered mutual fund, such trading was thus not subject to the same investment restrictions as may be applicable to the Fund. If it had been, the performance may have been lower. Past performance is not indicative of future returns. Backtest performance is not indicative of future returns. Please see the Offering Documents for risk disclosures.
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1. Stacking Those Dollars Regardless the Cost
More often than not, investors convert cash into their local currency, when selling U.S. assets. For instance, if a foreign investor sold some U.S. stocks, they would typically convert the proceeds of that sale into their domestic currency.
But lately U.S capital flow data suggests that the international stockpile of dollars is close to its all time high, with more investors opting to hold on to dollars in preference of their domestic currency. As monetary policies globally diverge, the chances of a global recession are making the greenback shine once again, especially as interest rates in the dollar go up. The dollar also provided haven to investors as the S&P 500 set foot into bear territory last week, dropping 20% from its most recent high. Despite many claims that the dollar remains overvalued, for now there appears to be few (if any) alternatives. The Swiss franc and Japanese yen have typically been haven currencies during times of economic turmoil, but the Bank of Japan’s loose monetary policy have made the yen less attractive against a backdrop of global inflation while the Swiss franc has been sidelined. Nevertheless, there is the possibility that when the war in Ukraine ends and supply chains are rehabilitated, the dollar could weaken. Later this week, all eyes will be on U.S housing market data with investors alert for any sign that higher interest rates could spark off a fresh housing crisis. |
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2. Stocks Get Hammered Across the Board, No Sector Safe
You know markets are bad when even energy companies get hammered in a time like this.
With the S&P 500 now officially in a bear market, the one bright spot remained the oil and gas industry, which benefited from soaring energy prices amidst sanctions against Russia, for its invasion of Ukraine. But now even that trade looks to be at risk as recession fears mount and the price of crude slips. Even the most insistent bull is having to question their optimism when the cycle of high inflation feeding into higher rates is pushing the global economy closer to recession. Companies are having to face multiple headwinds, from rising costs of raw materials and labor, to weakening demand as inflationary pressures bite and this has the potential to spark off a recessionary spiral. In times like these, resilience is key as the markets test the grit of investors. Unexpected swings coupled with the Fed’s aggressive hikes, flipping of the liquidity tide and the economic slowdown, will continue to pressurize stocks, fuel volatility and challenge even the most resolved investment theses. |
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3. Crypto Crash Survivors Could be Future Tech Giants
While cryptocurrency prices are being challenged at the moment, there’s more than an outside chance that the survivors of this latest winter could become the killer apps of a future spring, at least according to the Bank of England’s Deputy Governor Jon Cunliffe.
Speaking with Bloomberg, Cunliffe compared the downward spiral of cryptocurrency prices with the bursting of the dotcom bubble in 2001, and noted that those who emerged from the crash, could one day head up the most important tech companies, the way Amazon.com (+3.20%) and eBay (-0.37%) revolutionized e-commerce and the way the world shops. Cunliffe believes that the technology powering cryptocurrencies is here to stay, just as the internet ultimately prevailed, despite countless dotcom-era companies folding. Significantly, the survivors of today, could become the victors a decade from now, the way Amazon.com grew to be so dominant after the dotcom crash. Cunliffe emphasized that cryptocurrency’s technology has a strong application potential in the financial sector. Looking past the uncertain cryptocurrency market, the Bank of England Deputy Governor “expects crypto technology and finance to continue”. |
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Jun 24, 2022