Novum Alpha – Daily Analysis 1 February 2021 (10-Minute Read)

In the midst of a pandemic, how time flies! Welcome to the start of a brand new month and markets are looking every bit as choppy as last month. 

In brief (TL:DR)

  • U.S. stocks entered the weekend lower with the S&P 500 (-1.93%), tech-centric Nasdaq Composite (-2.00%) and blue-chip Dow Jones Industrial Average (-2.03%) all reeling from the retail-led carnage in the markets last week as futures activity suggests further weakness. 
  • Asian stocks rebounded sharply on the first trading day of a new month on signs that the retail investor-led mob is receding and on slower growth out of China suggesting that Beijing is less likely to tighten monetary policy. 
  • U.S. 10-year Treasury yields ended last week more or less unchanged at 1.07% as investors sat out while the retail mob took over the markets (yields rise when bond prices fall). 
  • The dollar fluctuated against major peers, with no clear direction.  
  • Oil was flat with March 2021 contracts for WTI Crude Oil (Nymex) (-0.02%) at US$52.19 as commodity traders took to the sidelines last week, spooked by the retail roiling of silver markets. 
  • Gold edged up with April 2021 contracts for Gold (Comex) (+0.32%) at US$1,856.30 as retail investors mobbed silver and saw some spillover into gold as well. 
  • Bitcoin(-2.15%) fell to US$33,457 as inflows into exchanges outpaced outflows and trading is expected to remain choppy this week (inflows typically suggest that traders are looking to sell Bitcoin in anticipation of lower prices). 

In today’s issue…

  1. Money Everywhere, But Not a Job to Do
  2. Pandemic Puts a Damper on China’s Lunar New Year Economy
  3. Another Day, Another Government Trying to Ban Cryptocurrencies 

Market Overview

And just as quickly as they came, they vanished. 
Some Wall Street insiders are privately heaving a sigh of relief as it appears that the grassroots-led movement (akin to QAnon) which saw shares in such firms as GameStop and AMC Entertainment pumped up to punish short sellers, appear to be losing steam. 
The thing about power is that once you’ve attained it, you better have a plan for what happens next. 
Like the Trump supporters who invaded the Capitol and the legions of QAnon followers who became disillusioned when Trump eventually retreated to Mar-a-Lago, retail investors following the cult of Reddit’s r/wallstreetbets are starting to question whether the movement is sustainable. 
Wall Street mostly sat out last week as bipartisan support from Congress to reign in what has been criticized as unruly market manipulation by retail investors restores some semblance of order. 
Over in Asia, investors felt safe enough to head back into the markets with Tokyo’s Nikkei 225 (+0.97%) , Hong Kong’s Hang Seng Index (+1.05%) , Seoul’s KOSPI (+1.36%)  and Sydney’s ASX 200 (+0.38%) all up. 

1. Money Everywhere, But Not a Job to Do

  • Employment growth stutters in the U.S. as it appears that the economic damage wrought by the coronavirus pandemic persists longer 
  • Job data out on Friday may provide the Democrats the evidence that they need to push for a fresh US$1.9 trillion stimulus package, which should buoy stocks in the following week 
The central bank and politicians may be flooding the U.S. market with dollars but what they haven’t been able to do (thus far) is flood it with jobs.
U.S. stocks look set to edge lower this week as economists are expecting the January jobs report to show a stagnant and persistently elevated unemployment rate – 6.7% – according to a Bloomberg survey ahead of Friday’s jobs data.
Unemployment in the U.S. has roughly doubled since the beginning of the pandemic and observers had been hoping for a turnaround towards the end of last year.
That turnaround failed to materialize as the coronavirus strain mutated and vaccinations did not roll out as quickly as hoped.
While January might still show a slight uptick in hiring, the U.S. economy is still struggling under the weight of a massive 140,000 jobs lost last month.
And while sectors of the American economy have shown some resilience, like housing and manufacturing, the labor market has struggled to gain ground.
Last week, U.S. Federal Reserve Chairman Jerome Powell pointed to the millions of Americans who continue to be out of work as a sign that the economic recovery still had a long way to go and reiterated the central bank’s stance of maintaining its current posture and pace of asset buying.
Democrats will be hoping that Friday’s jobs data will be poorer than analyst forecasts, providing them with additional fuel to push through the Biden administration’s plan to inject an additional US$1.9 trillion in stimulus that would include more supplementary unemployment benefits.
If the U.S. jobs data is indeed poorer, as some have suggested it is likely to be, value stocks and those most likely to be affected by a weaker economic outlook are more likely to sag, while investors may yet again seek safety in growth stocks.  

2. Pandemic Puts a Damper on China’s Lunar New Year Economy

  • Hospitality, travel and entertainment industries likely to lose out as pandemic restrictions put a damper on Lunar New Year holiday travel 
  • Manufacturing sector, especially healthcare and electronics, remain a bright spot for Chinese economy
In any other year, hundreds of millions of Chinese from across the Middle Kingdom would have spent significant chunks of their salaries buying Lunar New Year gifts for loved ones and overpaying for travel tickets to make the trip back home to their villages by now. 
But not this year. 
Efforts by Beijing to control the recent resurgence in coronavirus infections are threatening to undermine a nascent recovery in what has been one of the most resilient economies in the world.
Official data for last month showed economic activity in China had expended at a much slower pace compared to last month, with the services sector markedly weaker.
Importantly, the manufacturing purchasing managers’ index (a measure of growth in the all-important manufacturing sector) fell to 51.3, while the non-manufacturing sector dropped to 52.4 from 55.7 in December, according to data released on Sunday by the National Bureau of Statistics.
Any number below 50 suggests contraction.
And while manufacturing activity in China typically slows ahead of the Lunar New Year holiday, overall economic activity rises from positive sentiment that fuels purchases of everything from new homes to new cars.
However, curbs on travel this year to try and stop the spread of the coronavirus pandemic will mean that many people won’t be able to return to their hometowns.
And showing off that brand-new BMW (-1.27%) won’t have that same impact if everyone is still under movement restrictions (as has been the case in an increasing number of Chinese cities).
While the limits on travel will cut Chinese spending on dining out and gifts, some analysts expect an increase in industrial output as firms look to work through the holidays to keep up with demand.
Although the economies of the west remain moribund, demand for goods from China has been surging thanks to a (literally) captive audience that has taken to online shopping.
Nonetheless, economists who had been hoping for China to make a switch to a more services-based economy and boosting domestic demand will find that such structural shifts will need to be delayed until the pandemic is brought to heel.
And while Chinese airlines have fared far better than their western counterparts, investors hoping for a holiday travel bump will be disappointed as a Chinese official from the Ministry of Transport said earlier last month that there would be 40% fewer trips this year than in 2019.
Chinese companies in dining, accommodation, entertainment and transport services are likely to come under continued pressure, but the industrial sector remains resilient.
Global demand for medical and electronic goods remains robust as China’s manufacturing sector continued to expand last month, albeit at a slower pace.
Yet all is not lost.
The weak numbers will provide a fillip for investors in Chinese equities as it will provide the basis for continued loose policy from the Chinese central bank.
In January, Chinese markets were roiled by a cash crunch and worries that a recovering economy might see the People’s Bank of China and Beijing tighten credit further. 
But the resurgent coronavirus and economic pressures may just provide investors in Chinese stocks with an early red packet. 

3. Another Day, Another Government Trying to Ban Cryptocurrencies

  • Indian lawmakers float bill to ban cryptocurrencies to pave way for their own central bank-issued digital currency 
  • Attempt to ban cryptocurrencies will push activity underground and may even spur more Indians to adopt cryptocurrencies as experienced in past episodes of New Delhi’s interference with the monetary system 
Despite providing the world with the bulk of its software engineers and tech company CEOs, India’s lawmakers may perhaps be the least tech-savvy anywhere in the world.
In a budget session of parliament that started last Friday, Indian lawmakers sought to introduce a bill to prohibit all private cryptocurrencies in the country, a reflection of the lack of understanding of cryptocurrencies and blockchain technology.
Ironically the raison d’être for the proposed law banning cryptocurrencies was to provide a framework for the launch of India’s own digital currency, to be issued by the Reserve Bank of India and allow specific exceptions to promote blockchain technology, which underpins cryptocurrencies.
To be sure, Satoshi Nakamoto, the mysterious creator of Bitcoin, did not request for permission before writing the Bitcoin whitepaper or mining the genesis block.
And for years, cryptocurrency firms in India have operated with minimal regulatory oversight and piecemeal law enforcement intervention.
Trying to “ban” cryptocurrencies in India is a bit like trying to ban the rain – it falls on both the knowledgeable and the ignorant.
Unsurprisingly, cryptocurrency markets responded to the Indian cryptocurrency ban with a collective “meh.”
This is hardly the first time that India has attempted to ban cryptocurrencies, with previous attempts being exercises in futility.
Cryptocurrency trading continues in India, albeit through exploiting various technological and legal loopholes.
If nothing else, the move by New Delhi will only push existing cryptocurrency exchanges and firms in the sector underground, depriving the country of badly needed tax revenues, when many of these firms have been asking to be regulated to operate in the open to begin with.
In 2018, India’s monetary policy regulator banned cryptocurrency transactions after a string of frauds in the months following Prime Minister Narendra Modi’s sudden decision to outlaw 80% of the country’s fiat currency.
Cryptocurrency exchanges sued the government in the Indian Supreme Court in September that year, a lawsuit that was dragged out till March of 2020, which saw the exchanges win respite against the arbitrary ban.
But that respite has proved brief and been a pyrrhic victory as New Delhi seeks to tighten the reins on its monetary system.
In 2018, the overnight ban of 50 and 100 rupee notes saw hundreds of millions of Indians lose their faith in the fiat currency system almost in an instant and swarm banks to turn in the soon-to-be worthless banknotes before the Indian government was forced to backtrack on that decision.
Since that time, a growing number of Indians have moved into cryptocurrencies over concerns that the New Delhi government might attempt a repeat of de-monetization.
Trying to institute another ban of cryptocurrencies might just push the undecided majority over the edge into cryptocurrencies as well. 

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

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