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Edge of reality

By Marius-Cristian Frunza
Weekly Briefs

S&P 500, the leading index of US large-cap equities ended another week at an all-time high. The previous financial crisis showed that a turmoil in the stock market could have latent repercussions upon the real economy in the long term. At that time, the easiest solution for central banks was to inject liquidity into financial markets. In the current crisis, is it really necessary to have such a massive monetary inflow? Are markets on the edge of reality?

Bringing support during a crisis can easily justify in the short term any type of money printing strategy.  Putting the entire stock market on steroids and driving the leading indices to all-time highs amid an unprecedented crisis, exposes the developed economies to unqualified risks.

Such actions are dangerous for two reasons. On the one hand, overbought stocks lead inevitably to mispriced assets for the underlying companies. When assets do not reflect the real value of their foreseeable earnings, any real investment is put on hold. Therefore, despite an abundance of monies in the financial market, those very monies do not finance the real economy.

On the other hand, extended irrational rallies in the stock prices increase the risk of moral hazard amongst the senior managers of big corporations. When managers are not required to serve shareholders with profits and have access to free monies, they can invest in risky projects or start tormented endeavours.

For instance, Tesla became overnight the world’s leading car manufacturer in terms of market capitalisation, while producing fewer vehicles than an Eastern European Renault factory. With wind into its sails, Tesla decided last week to invest not less than 1.5 billion USD in Bitcoin, an asset which has nothing in common with Tesla’s core activity. Moreover, investors saluted the move, and Tesla’s share appreciated over the last trading sessions.

Retail investors should wake up from the long and sweet reverie before it overlaps with dreams of agony.

Reality is merely an illusion, albeit a very persistent one. Albert Einstein

Market overview

The leading stock indices were clearly into positive territory over the past weak and reached new all-time highs. Oil and bitcoin kept heading north, while the gold ounce retreated again below 1,830 USD.

Meanwhile, the volatility index is at its lowest level since the pandemic outbreak reaching levels comparable to those recorded in February 2020. If the VIX breaks the support level of 15%, the market configuration will become very interesting and very difficult to read. Silence is, in many cases, more frightening than havoc.

Focus:

Amsterdam rising

In January, Amsterdam overtook the City of London as Europe’s largest share trading centre. It is becoming clear that Amsterdam becomes the new rising star amongst the global financial hubs. It came with good news for AEX, the leading Dutch stock index. Compared to its European peers, AEX behaved better and overpassed the levels it had previous to the pandemic outbreak.

When the British referendum triggered Brexit, Frankfurt was in pole position to become Europe’s leading financial place. It made sense as the European Central Bank’s headquarters are in Frankfurt. Will Amsterdam keep its advantage in this competition?

Focus:

Clover Health

An extensive report published by Hindenburg Research pointed to several alleged issues with Clover Health, a data-driven health insurance company. The investigation unravelled an ongoing investigation of the Department of Justice concerning the marketing practices of the New Jersey-based company. Clover’s share lost territory since the beginning of the year, and Hindenburg’s report accentuated the bearish trend.  Clover published a response to the allegations, but the market did not improve its pricing.

Focus:

Twitter

When Twitter suspended Trump’s account amid the November general elections, we believed that it was the end of the micro-blogging platform. However, since mid-January Twitter’s share had a strong rally gaining almost 60%. Q4 earnings came out, and surprisingly, Twitter’s revenues climbed 28% beating analysts’ expectations. Twitter has all the chances to join Facebook in the league of major social media players. The troubles are behind, bygones are bygones, and the future seems more promising than ever for Twitter.

Cryptocurrencies:

Bitcoin

Every other day, there are new developments in the Bitcoin arena. Last week brought a new rally for the leading cryptocurrency. Tesla notified the SEC,  the American market watchdog, about its intentions to inject 1.5 billion dollars in Bitcoin. On the same note, Twitter CEO Jack Dorsey and the American rapper Jay-Z announced the launch of a Bitcoin fund.

Institutional investors become more present in the crypto-arena bringing more credibility and erasing at least partially the suspicions playing over this new market.

Market outlook

Bitcoin continued its rally and finished the week above 47,000. There are good reasons to believe that Bitcoin will continue its march towards 50,000 USD in the long-run.

The equity market reached an all-time high, but some corrections could be expected over the next week.

Oil prices had a significant increase, and there are reasons to expect an equilibrium price above 60 USD.  The Gold ounce is currently oversold, and any bearish developments in the leading stock markets could bring a positive direction in the next quarter.

General Disclaimer

The information and data published in this research were prepared by the market research department of Darqube Ltd. Publications and reports of our research department are provided for information purposes only. Market data and figures are indicative and Darqube Ltd does not trade any financial instrument or offer investment recommendations and decision of any type. The information and analysis contained in this report has been prepared from sources that our research department believes to be objective, transparent and robust.

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