Novum Alpha – Daily Analysis 10 December 2020 (10-Minute Read)

Terrific Thursday to you and I hope you’re doing well! 

In brief (TL:DR)

  • U.S. stocks took a beating on Wednesday with the S&P 500 (-0.79%), blue-chip Dow Jones Industrial Average (-0.35%) and tech-centric Nasdaq Composite (-1.94%) all lower on a slide in tech stocks as Facebook (-1.93%) faces its largest antitrust challenge ever. 
  • Asian stocks were a mixed bag in the morning trading session on Thursday, with fewer technology stocks but on concerns that the region may not have completely licked the coronavirus with surging cases in Japan and Hong Kong. 
  • U.S. 10-year Treasury yields ticked lower to 0.928% as investors turned cautious and moved out of stocks (yields rise when bond prices fall). 
  • The dollar was steady as investors shunned a variety of risk assets. 
  • Oil was mostly flat with January 2021 contracts for WTI Crude Oil (Nymex) (+0.35%) at US$45.68 from US$45.52. 
  • February 2021 contracts for Gold (Comex) (+0.10%) rose to US$1,840.30 from US$1,838.50, as investors turned ever so slightly cautious. 
  • Bitcoin (+1.27%) rose to US$18,456 from US$18,225 as flows into exchanges slowed and investors took the opportunity to buy the dip (inflows typically suggest that investors are looking to sell Bitcoin in anticipation of price falls). 

In today’s issue…

  1. U.K. Housing Market Made Breathless by the Coronavirus 
  2. A Cruise Ship Case Study on the Coronavirus 
  3. Cryptocurrency Converts Even the Most Skeptical 

Market Overview

It never rains in Palo Alto, but when it does, it pours. 
And right now, tech CEOs in the Silicon Valley are clamoring to find umbrellas as authorities from the U.S. to Europe now have Facebook firmly in their crosshairs. 
The U.S. is suing the social media giant for “years-long” abuse of its monopoly power. 
Whether such an action is in part motivated by Trump’s defeat at the recently concluded U.S. Presidential race is less clear, but he has been known to have a vindictive streak. 
The thing about social media is that most people are a fan of it when it works for them. 
With both Twitter (-0.46%) and Facebook pushing to curb misinformation and misleading content in the runup to this year’s elections, there was bound to be some form of backlash no matter who’s party won. 
And those social media chickens have finally come home to roost with the antitrust case against Facebook rippling across the broader markets and sending major U.S. indices, which are increasingly more tech-heavy, lower. 
In Asia, markets were mainly a mixed bag with Tokyo’s Nikkei 225 (-0.70%) and Sydney’s ASX 200 (-0.44%) lower, while Hong Kong’s Hang Seng Index (+0.75%) and Seoul’s KOSPI (+0.84%) up.  

1. U.K. Housing Market Made Breathless by the Coronavirus

  • U.K. housing prices may be set to fall as unemployment rises and as sales inquiries start to reveal a downward trend in demand 
  • Messy and uncertain Brexit may see economic prospects of the U.K. sink, put pressure on the pound and may provide buying opportunities to those still looking to snap up British real estate
As the spiritual heart of the British Empire, property in London has long been a status symbol for some of the wealthiest from former British colonies.
From Bermuda to Boston, Singapore to Sydney, an apartment or house in one of London’s toniest districts was as much a mark of good standing, as a child attending Eton.
And despite Brexit and the coronavirus pandemic, the U.K. housing market has remained remarkably resilient, up till now.
As British Prime Minister Boris Johnson trekked to Belgium, tail between his legs to negotiate the terms of Brexit, the Royal Institution of Chartered Surveyors revealed that a gauge of new buyer inquiries for U.K. property had slowed markedly, even though an index of prices over the past three months stayed near its highest level since 1999.
Whilst hundreds of thousands of British workers were applying for unemployment benefits, British realtors were having a field day, catering to overseas buyers and locals alike, but a majority of them now envision weaker sales in the year ahead.
U.K.’s property market experienced a strong upswing since the country lifted lockdowns in the spring that shuttered the real estate market, bolstered by city dwellers looking to move out of urban centers and a temporary tax break on purchases, with government promises of soft loans for younger buyers.
But growing expectations of a material rise in unemployment has tempered real estate demand, particularly in London.
According to forecasts published by the Confederation of British Industry, joblessness will peak at 7.3% in the second quarter of 2021.
And if Johnson fails to reach a post-Brexit trade deal with the European Union, business investment will be hit even further.
As it is, dozens of high-profile British companies are shifting their manufacturing bases to the European continent, as the U.K. prepares for a messy, and potentially deal-less Brexit.
Such an outcome would shave off as much as 0.5% of GDP growth over the next two years and its impact likely to persist for years after that.
Whilst most British businesses have barely pushed past the pandemic, a messy Brexit could be the last straw on the camel’s back and that could mean more downside for British real estate prices.

2. A Cruise Ship Case Study on the Coronavirus

  • Singapore outbreak of coronavirus on a cruise to nowhere demonstrates the struggle that countries will have to reopen borders for travel and business 
  • Road to recovery for airlines, cruise operators and other travel-related companies may be longer than expected and recent reversal in their stocks may be premature 
Singaporeans are notoriously risk averse.
So risk averse are Singaporeans that the government of this prosperous city state has had to roll out ad campaigns to encourage its citizens to take on more risk as entrepreneurs, or in new careers as the country seeks to reinvent itself economically.
With some of the highest civil service salaries in the world, in the past, most young people would rather opt for a “safe” job in Singapore’s vast technocratic bureaucracy, than slug it out in the rough and tumble world of startups.
But over the past decade, attitudes towards entrepreneurship and risk have shifted, even manifesting itself in the political circle where a record number of opposition politicians are now in parliament, challenging conventional notions that Singaporeans are an unadventurous lot.
As a trade and tourism-dependent economy, the coronavirus pandemic has been particularly hard on Singapore’s economy and the government is understandably keen to open up borders and resume travel.
Yet despite all the caution and preventative measures taken before allowing cruises to nowhere on the many luxury cruise ships plying from Singapore, the inevitable happened – a coronavirus infection occurred in an elderly passenger on a Royal Caribbean Cruises (-0.68%) ship.
The optimism displayed just two months ago when Singapore’s Transport Minister Ong Ye Kung pledged to re-open the country and its tourism-dependent economy, has since taken a beating.
A proposed travel bubble with Hong Kong last month was burst when coronavirus cases in that city surged and in the early hours of Wednesday morning, the 1,680 passengers and 1,148 crew members aboard the Quantum of the Seas found out that their 4-day cruise was about to get a lot longer.
As word that a coronavirus infection was discovered aboard the ship, passengers took to their balconies in an almost too familiar 2020 sight – getting fresh air while being confined to their state rooms as the arduous process of contact tracing and testing got under way.
The bigger issue though was that the 83-year-old man who tested positive for the coronavirus was found to be negative at a subsequent test, raising concerns that testing itself may not be an entirely reliable means to reopen trade and travel routes.
Singapore’s ill-fated attempts to restart tourism underscore the challenges that countries face to reopen borders, even in a nation where community transmission has been close to zero for several weeks.
Despite some of the most stringent protocols to facilitate sea voyages, including extensive testing of crew and passengers, a much-feared coronavirus infection still occurred.
Ultimately the increased sanitization, improved fresh air circulation, plus measures that included compulsory mask-wearing and buffets staffed by servers in protective gear, still proved insufficient to combat a virus that’s raging in the U.S. and Europe.  
And that may give investors food for thought given the recent rotation into companies that have seen their stocks rise on news that a coronavirus vaccine may soon be widely available, including airlines and cruise operators.
Stocks in these languishing sectors saw a sharp rise on news that not one, but several effective coronavirus vaccines had been developed.
But the Singapore experience should show that until and unless a coronavirus vaccine is widely available and administered, any premature push to open borders will inevitably result in fresh outbreaks and sudden shocks to the stocks of these companies. 

3. Cryptocurrency Converts Even the Most Skeptical

  • Demand for Bitcoin could ultimately hurt the long term prospects of gold, particularly as a hedge against inflation 
  • Short term Bitcoin may be overbought and gold may be oversold, but outflows from gold ETFs and into Bitcoin trusts suggest that the two are correlated 
Not so long ago, in a banking giant not so far away, JPMorgan Chase (-0.78%) CEO Jamie Dimon declared at the CNBC-Institutional Investor Delivering Alpha conference in 2017, that Bitcoin was a “fraud,”
“It’s worse than tulip bulbs. It won’t end well. Someone is going to get killed. It’s not a real thing, eventually it will be closed.”
Since then, JPMorgan Chase has issued its own JPM Coin to speed up internal settlements between clients and Dimon has had a change of heart when it comes to cryptocurrencies.
Now the bank is suggesting that the rise of cryptocurrencies in mainstream finance is coming at the expense of gold.
Vast amounts of money have been poured into Bitcoin funds, sucking the life out of gold since October.
And according to JPMorgan Chase quantitative strategist Nikolas Panigirtzoglou, the trend will only continue in the long run as more institutional investors take a position on cryptocurrencies.
As cryptocurrencies become an increasingly popular asset class, JPMorgan Chase is one of a handful of Wall Street banks that’s predicting a major shift from gold to digital assets, posing a problem for precious metal bulls in the coming years if even a small slice of gold investors shift to its digital equivalent Bitcoin.
In a note, JPMorgan Chase strategists wrote,
“The adoption of bitcoin by institutional investors has only begun, while for gold its adoption by institutional investors is very advanced.”
That observation is reflected in the massive inflows into Grayscale Bitcoin Trust, a listed security popular with institutional investors, which has seen inflows of almost US$2 billion since October, compared with outflows of US$7 billion from gold-backed ETFs.
According to JPMorgan Chase, Bitcoin currently only accounts for 0.18% of family office assets, compared with 3.3% for gold ETFs.
Even a slight shift out of the precious metal into Bitcoin, could represent billions of dollars in fund flows and according to the bank, one way to play them is to buy one unit of Grayscale’s Bitcoin Trust for every three units of the SPDR Gold Trust sold.
Unlike other Wall Street banks such as Goldman Sachs (+1.69%) and Citigroup (+1.03%), which are projecting that gold will push higher next year, JPMorgan Chase strategists are predicting that the price of gold would suffer from structural headwinds over the longer term as more investors bet on Bitcoin.
Nonetheless, JPMorgan Chase strategists cautioned that in the short term, there’s a good chance that Bitcoin may be overbought and this has been demonstrated in its repeated failed attempts to breach the US$20,000 level, while gold may see a short term recovery for being oversold. 

Novum Digital Asset Alpha is a digital asset quantitative trading firm.

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The information and thoughts laid out in this analysis are strictly for information purposes only and should not be regarded as an offer to sell or a solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be in violation of any local laws.

It does not constitute a recommendation or take into account the particular allocation objectives, financial conditions, or needs of specific individuals.

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