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Novum Alpha - Daily Analysis 19 July 2022 (10-Minute Read)

A terrific Tuesday to you as stocks remain subdued amid growth worries stoked by tech giant Apple (-2.06%), which is slowing hiring plans and reporting a bleaker outlook.

 

In brief (TL:DR)

 
  • U.S. stocks closed lower on Monday with the Dow Jones Industrial Average (-0.69%), S&P 500 (-0.84%) and the Nasdaq Composite (-0.81%) all in red.
  • Asian stocks were subdued Tuesday after Apple’s plans to slow hiring highlighted concerns that aggressive monetary tightening to tackle inflation portends an economic downturn.
  • Benchmark U.S. 10-year Treasury yields slipped to 2.97% (yields fall when bond prices rise) as risk aversion took grip.
  • The dollar remained near a record high.
  • Oil dipped but held above $100 a barrel with August 2022 contracts for WTI Crude Oil (Nymex) (-0.02%) at US$102.58 and will likely stay there for the rest of the year, according to Iraq’s energy minister.
  • Gold edged lower with August 2022 contracts for Gold (Comex) (-0.26%) at US$1,705.70. 
  • Bitcoin (+4.24%) rose to US$22,095, moving in contrast to other risk assets like equities, with the benchmark cryptocurrency coming close to levels not seen since June before retracing. 
 

In today's issue...

 
  1. A Stronger Dollar Could Doom Everyone
  2. China’s Richest Want to Leave
  3. Altcoins Lead the Charge as Bitcoin Crosses US$22,000
 

Market Overview

 
Corporate updates such as Apple’s are helping markets to calibrate the risk of recession. Signs that high inflation and monetary tightening are squeezing consumers and employment could feed into worries that an equity revival since mid-June is merely a brief respite in a bruising bear market.
 
The bond market reflects expectations for a short, sharp U.S. Federal Reserve interest-rate hiking cycle that gives way to cuts next year to shore up growth.
 
In China, officials may allow homeowners to temporarily halt mortgage payments on stalled property projects without incurring penalties, easing the burden on consumers but compounding challenges faced by real estate developers.
 
Beijing is racing to prevent a crisis of confidence in real estate from upending the world’s second-largest economy.
 
Asian markets were lower on Tuesday with Seoul's Kospi Index (-0.19%), Sydney’s ASX 200 (-0.32%) and Hong Kong's Hang Seng Index (-0.93%) down, while Tokyo's Nikkei 225 (+0.71%) was up.
 

 

 

1. A Stronger Dollar Could Doom Everyone

 
  • A stronger dollar hits export-oriented economies like Japan and Germany particularly hard, and their weakening currencies compress margins for their manufacturers who rely on dollar-denominated imported raw materials.
  • With the Fed in full-on inflation-fighting mode, the U.S. is exporting even more inflation than it had been previously.
     
Not so long ago, in a global economy not so far away, governments would accuse each other of devaluing their currencies to boost exports.
 
But decades of loose monetary conditions and the fastest pace of inflation in over four decades in the United States is forcing the U.S. Federal Reserve to tighten policy and raise rates for the first time in years, paving the way for other central banks to follow suit, even if such a policy is inappropriate for their specific economic conditions.
 
Because commodities are priced in dollars, the Fed raising interest rates devalues the currencies of other countries and exports inflation, while making dollar-denominated materials cheaper for American consumption.
 
A stronger dollar hits export-oriented economies like Japan and Germany particularly hard, and their weakening currencies compress margins for their manufacturers who rely on dollar-denominated imported raw materials.
 
With the Fed in full-on inflation-fighting mode, the U.S. is exporting even more inflation than it had been previously.
 
Whereas countries like Germany and China, which ran big trade surpluses, often got blamed for free-riding on demand generated elsewhere, the U.S. has now narrowed the trade deficit to its lowest level in decades and that has everything to do with a soaring dollar.
 
And that could be a major problem for the exporting powerhouses of China, Japan and Europe.
 
Because monetary policy is a blunt instrument that tries to rein in prices by dampening domestic demand, imported inflation, which China, Japan and Europe are susceptible to because they import raw materials denominated in dollars, will find themselves stuck in a quagmire where they must raise rates, but doing so will just slow their already lackluster economies.
 
 

2. China's Richest Want to Leave

 
  • Sudden and rolling lockdowns as part of Chinese President Xi Jinping’s zero-Covid policies and with the economic outlook in the world’s second largest economy more murky than ever, as many as 10,000 Chinese high-net worth individuals are contemplating leaving China.
  • Getting money out of China is not the only challenge facing many well-heeled Chinese, as receiving countries have layered on additional restrictions for would-be immigrants, as a wave of nationalism and closed borders came from the pandemic.
 
Far from developing Stockholm syndrome (where a hostage victim starts to trust their captor), millions of Chinese richest people are thinking of the unthinkable – taking their blood and treasure with them to leave the land of their birth.
 
Scarred by repeated, sudden and rolling lockdowns as part of Chinese President Xi Jinping’s zero-Covid policies and with the economic outlook in the world’s second largest economy more murky than ever, as many as 10,000 Chinese high-net worth individuals are contemplating leaving China.
 
Investment migration consultancy Henley & Partners estimates that 10,000 rich Chinese are looking to pull some US$48 billion from China this year alone, only second to the outflow of people and wealth from Russia.
 
But the bigger question is whether China’s richest can leave.
 
Beijing has not ostensibly tightened the screws on relocating, some immigration lawyers claim that moving has become more difficult in recent times and passport processing times have increased dramatically, with the bureaucratic red tape now more onerous.
 
Many overseas counterparties who had long helped Chinese to sidestep Beijing’s strict capital controls via private swap arrangements have left China because of zero-Covid lockdowns and travel restrictions, making it far more challenging for rich Chinese to spirit large sums of money out of China.
 
Migration consultants and lawyers in China that Bloomberg spoke with said inquiries about emigration have soared by as much as five times this spring, when Shanghai was in lockdown, compared to a year earlier.
 
The number of inquiries about moving money out of China has also increased exponentially.
 
Although spiriting money out of China using existing methods may be more challenging, there are signs that Chinese are attempting to use cryptocurrencies to get money out of China, as they had done in 2015.
 
Chinese citizens are only allowed to convert US$50,000 worth of yuan into foreign currency each year, but many find ways to get even more out of the country through a variety of means, including a system similar to the Hawala system favored in emerging markets.
 
A Hawala system is a popular and informal value transfer system based not on the movement of cash, but instead on the performance and honor of a huge network of money brokers.
 
Getting money out of China is not the only challenge facing many well-heeled Chinese, as receiving countries have layered on additional restrictions for would-be immigrants, as a wave of nationalism and closed borders came from the pandemic.
 
Singapore, a favored destination for many Chinese looking to leave the country, has recently tightened immigration policies and visas are becoming more difficult to obtain, as has become the case in many other destinations favored by the Chinese.
 
 

3. Altcoins Lead the Charge as Bitcoin Crosses US$22,000

 
  • Ether, Solana and a host of other so-called “altcoins” staged a remarkable comeback, clocking double digit rebounds before retracing slightly.
  • Altcoins have outperformed Bitcoin’s gains in the past several days, suggesting that some degree of speculation may be creeping back into markets, but that performance may also be somewhat illusory.
 
Global risk markets may be on edge, but there are signs that cryptocurrencies may have found a tentative bottom.
 
Whilst it’s probably too early to say that a durable rally in cryptocurrencies is on the cards, Bitcoin has come its closest to US$23,000 since June and the overall market cap of the industry has recovered to US$1 trillion.
 
Ether, Solana and a host of other so-called “altcoins” staged a remarkable comeback as well, clocking double digit rebounds before retracing slightly.
 
But investors looking for Bitcoin to reach exit velocity will be disappointed that the benchmark cryptocurrency is still struggling to break free from its US$19,000 to US$22,000 range, even though a lot of leverage has already washed out of the system.
 
Nevertheless, some believe that a sustained break over US$22,000 could renew speculative momentum, and possibly provide a fresh floor, especially given that expectations of aggressive U.S. Federal Reserve rate hikes have dialed down somewhat.
 
Ether remains a strong outlying performer, extending a rally that started earlier last week after developers of the Ethereum blockchain finally provided a target date for the much-anticipated software upgrade known as “The Merge” and that would make securing transactions far more energy efficient.
 
Altcoins have outperformed Bitcoin’s gains in the past several days, suggesting that some degree of speculation may be creeping back into markets, but that performance may also be somewhat illusory.
 
Thinner liquidity means that lower levels of buying are sufficient to move prices significantly in either direction for many altcoins.
 
 

What can Digital Assets do for you?

 
Novum Alpha has a range of regulated cryptocurrency fund products specifically catered to accredited and institutional investors from all over the world. 
 
From our pure-alpha Novum Alpha Global Opportunity Digital Asset Fund that aims to deliver multiples on investment with no leverage, to our market-neutral cash-and-carry spot-futures arbitrage Novum Alpha All Weather Crypto Fund, there's something for all risk appetites and investors profiles.
 
For sophisticated investors, the Novum Alpha Global Opportunity Digital Asset Fund remains one of the best ways to gain exposure to the digital asset sector, in an unleveraged, institutional vehicle that seeks to return multiples on capital. 
 
To find out more about our products and services, please visit us at: 
 
 
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.  

Jul 19, 2022

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