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Novum Alpha - Daily Analysis 25 July 2022 (10-Minute Read)

A terrific Monday to you as stocks dip on recession worries and growing concerns that the U.S. Federal Reserve and Treasury Department are not taking the threat of a recession seriously.

 

In brief (TL:DR)

 
  • U.S. stocks finished lower on Friday with the Dow Jones Industrial Average (-0.43%), S&P 500 (-0.93%) and the Nasdaq Composite (-1.87%) all down.
  • Asian stocks slipped Monday, sapped by a dimming economic outlook that’s also cooling expectations for peak interest rates and bolstering sovereign bonds.
  • Benchmark U.S. 10-year Treasury yields climbed three basis points to 2.78% (yields rise when bond prices fall) but remain at their lowest level in weeks. 
  • The dollar fluctuated.
  • Oil slid with September 2022 contracts for WTI Crude Oil (Nymex) (-0.70%) at US$94.04 on growing recession fears.  
  • Gold was lower with December 2022 contracts for Gold (Comex) (-0.10%) at US$1,743.50. 
  • Bitcoin (-2.20%) fell to US$21,846, reflecting the cautious mood across risk assets and retreating in line with stocks. 
 

In today's issue...

 
  1. U.S. Treasury Secretary Fails to See Signs of Recession
  2. Beijing Devises Plan to Prevent Wave of U.S. Delistings
  3. Has Bitcoin finally found a bottom?
 

Market Overview

 
Investors have shifted to betting that ebbing economic expansion, and possibly even a recession, will moderate high inflation and soften the current cycle of monetary tightening that’s roiled global markets in 2022.
 
The U.S. Federal Reserve policy decision this week, along with earnings from the likes of Google’s Alphabet Inc. (-5.63%) and technology titan Apple Inc. (-0.81%), will help to clarify the outlook for a one-month-old rebound in stocks from 2022’s selloff.
 
China’s property shares bucked the prevailing trend, pushing higher amid a report that officials plan a fund to support struggling developers. The nation’s real-estate crisis is among the major fault-lines for the world economy.
 
Asian markets were mostly down on Monday with Tokyo's Nikkei 225 (-0.76%), Sydney’s ASX 200 (-0.03%) and Hong Kong's Hang Seng Index (-0.75%) down, while Seoul's Kospi Index (+0.76%) was up.
 

 

 

1. U.S. Treasury Secretary Fails to See Signs of Recession

 
  • Treasury Secretary Janet Yellen expressed confidence in the Federal Reserve’s fight against inflation and said she doesn’t see any sign that the US economy is in a broad recession.
  • Yellen’s comments may provide the U.S. Federal Reserve with the necessary ammunition to move ahead with another aggressive round of interest rate hikes this week.
     
Traders can gird their loins for a rough open this final week of July as U.S. Treasury Secretary Janet Yellen argues that there are few (if any) signs that the U.S. economy is headed into a recession.
 
Speaking at NBC’s “Meet the Press” on Sunday, Yellen noted,
 
“We’re likely to see some slowing of job creation. I don’t think that’s a recession. A recession is a broad-based weakness in the economy. We’re not seeing that now.”
 
Yellen’s comments may provide the U.S. Federal Reserve with the necessary ammunition to move ahead with another aggressive round of interest rate hikes this week.
 
The Fed is largely expected to stick with a 75-basis-point hike this week and markets have priced in front-loading of higher rates to deal with white hot headline inflation in the U.S. that is at its highest level in four decades.
 
But there is an outside chance of a full 1% rate hike, as policymakers come under pressure to rein in prices which are hurting American consumers.
 
Yellen acknowledged that U.S. inflation, with the CPI data for June at 9.1% from a year earlier, was still “way too high” and pledged that the Biden administration was committed to doing something about it.
 
“The Fed is charged with putting in place policies that will bring inflation down. And I expect them to be successful.”
 
And whether the U.S. economy is in a recession or not isn’t up to Yellen or the Fed.
 
Instead, the same way that Punxsutawney Phil, a groundhog from Pennsylvania that proclaims whether there will be six more weeks of winter or an early spring, it’s the academics at the National Bureau of Economic Research who declare whether there’s a recession or not.
 
Yellen argues that even if the U.S. posts two consecutive quarters of economic contraction (which typically qualifies as a recession), she doesn’t expect a recession to be declared,
 
“I would be amazed if the NBER would declare this period to be a recession, even if it happens to have two quarters of negative growth. We’ve got a very strong labor market. When you’re creating almost 400,000 jobs a month, that is not a recession.”
 
Yellen’s view is highly problematic on various levels, not least of which because earlier she says that there are no signs of recession because the labor market is tight, yet in the same NBC interview, she says that negative growth is not a recession because there is job growth.
 
So, which is it?
 
Does a recession rely on the labor market for data or not?
 
And the more uncertain the definition of a recession is, the more it hamstrings policymakers to act decisively, especially for the Fed to cut rates despite signs of economic stress and that means more volatility and likely downward pressure on a variety of risk assets, especially equities.
 
 

2. Beijing Devises Plan to Prevent Wave of U.S. Delistings

 
  • China is currently in the midst of preparing a system to sort U.S.-listed Chinese companies into groups based on the sensitivity of the data that they hold.
  • The move would help provide some clarity as to which sort of Chinese firms face delisting, and which one are likely to remain compliant and unfortunately, the prognosis favors the sort of companies that are not investor favorites.
 
At a time when the China’s economy is rapidly slowing, its real estate sector which contributes almost a third to GDP is buckling and its leader President Xi Jinping is jostling for an unprecedented third term in office, the last thing Beijing needs is more economic problems.
 
Long a source of foreign investment, the listing of Chinese firms on American exchanges has been a symbiotic relationship that has benefited both sides of the Pacific.
 
China gains access to America’s deep and liquid capital markets and global investors have a forum to tap into the growth story and huge markets of China.
 
But as tensions between Washington and Beijing have grown, so too has this symbiotic relationship, with tit-for-tat actions taken on both sides that culminated in the unceremonious delisting of ride-hailing giant Didi Global (-6.32%).
 
Since then, Beijing has backed down somewhat, recognizing that now is not the opportune time to create more economic problems for itself and China is currently in the midst of preparing a system to sort U.S.-listed Chinese companies into groups based on the sensitivity of the data that they hold.
 
A clear concession by Beijing to try and stop American regulators from delisting hundreds of Chinese companies from its bourses, the system is designed to bring some into compliance with fresh U.S. rules that require public companies to allow U.S. regulators to inspect and audit their files.
 
The move would help provide some clarity as to which sort of Chinese firms face delisting, and which one are likely to remain compliant and unfortunately, the prognosis favors the sort of companies that are not investor favorites.
 
Technology, telecommunications and other tech-intensive companies are all but certain to fall under Beijing’s categorization of holding “sensitive data” although firms could attempt to restructure their operations to ringfence the data to put it just beyond the reach of U.S. regulators.
 
Nevertheless, the categorization system that Beijing proposes is a significant concession and would remove hurdles allowing U.S. regulators full access to audits.
 
“Low risk” data companies are likely to include retailers and restaurant chains, which are not hot on investor lists for growth potential and profitability.
 
Even ride-hailing applications like Didi Global are likely to fall outside of the bounds of Beijing’s appetite for data transparency.
 
Time is running out for Chinese firms, and China has a lot more to lose in this game of political brinksmanship than the United States.
 
With global inflation soaring, the U.S. dollar has been rising against all other major currencies, especially the Chinese yuan, as the monetary policies of the two countries diverge.
 
China’s economy looks highly unlikely to meet its ambitious 5.5% growth target this year, thanks to repeated cycles of zero-Covid lockdowns and a broad crackdown on many of the country's most lucrative sectors.
 
And with the dollar making imports of the necessary fuel and industrial commodities that China depends on to power its industrial machine becoming even more expensive, Beijing can ill-afford for more economic weakness.
 
Access to global dollar-based capital markets is crucial for China right now, and its more likely than not that Beijing will find a way to resolve a longstanding issue on its companies listed on American exchanges.
 
 

3. Has Bitcoin finally found a bottom?

 
  • If Bitcoin has found a bottom, it appears that bottom is around the US$20,000 level, which for long-term Bitcoin investors, the cryptocurrency seems well clear of (for now).
  • Some analysts are suggesting that Bitcoin may have found a bottom, but risk appetite will need to return before cryptocurrencies can see any durable leg up.
 
As quickly as the legion of Bitcoin maximalists found wind in their sails when the benchmark cryptocurrency rebounded over US$23,000 last week, just as quickly, the winds died down and Bitcoin sank to US$21,825 (at the time of writing).
 
If Bitcoin has found a bottom, it appears that bottom is around the US$20,000 level, which for long-term Bitcoin investors, the cryptocurrency seems well clear of (for now).
 
But a buzz is building in crypto-investor circles and on Crypto Twitter (like regular Twitter but everyone only talks crypto), about Bitcoin’s stealth rally in July – it was so stealthy that no one noticed it.
 
Some analysts are suggesting that Bitcoin may have found a bottom, but risk appetite will need to return before cryptocurrencies can see any durable leg up.
 
Bottom or dead-cat bounce however is less clear, because trying to read charts on Bitcoin is akin to reading tea leaves – they reveal whatever future an investor already believes.
 
While cryptocurrencies have moved in lockstep with stocks, in particular the Nasdaq 100 for most of the year, that correlation slipped this month, dropping to as low as 0.50 on a rolling 60-day correlation (a correlation of 1 means that both assets move identically).
 
Although both Bitcoin and Ether have recovered somewhat from their low in June, tightening monetary conditions, and the soaring cost of living mean that a lot more will be needed to sustain a rally in the risk asset.
 
The U.S. Federal Reserve is set to raise interest rates this week, with bets of anywhere between a 75-basis-point hike to a full 1% raise of borrowing costs, dampening sentiment and appetite for more investment into risk assets, including cryptocurrencies.
 
A soaring dollar also hurts Bitcoin’s allure, the same way that other commodities, especially gold, slip whenever the greenback rises and this has played out in countries which have had to contend with soaring inflation, for whom a bet on cryptocurrencies is the “least bad” available alternative.
 
Many investors remain seated on the sideline, which is why Bitcoin continues to trade sideways.
 
Although tons of excess leverage have already been flushed out of the cryptocurrency system, with even the Grayscale Bitcoin Trust product trading at a deep discount to the underlying token, investors still remain cautious.
 
Blockchain analysis suggests that even if a bottom has not been reached, it is certainly being formed, with the onchain purchase price of Bitcoin below its current achievable price.
 
Many retail investors remain spooked, having been burned by a spate of failures in cryptocurrency lenders and exchanges and this will likely keep them away for now – retail investors like to buy when markets are up, and prices are high.
 
The only other source of buying energy is institutional investors, who are so far sitting on the sidelines.
 
 

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Jul 25, 2022

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