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Turning point

By Marius-Cristian Frunza
Weekly Briefs

Biden plans to raise taxes on capital gains, Bitcoin plunges by nearly 10,000 USD and the pandemic ravages India. And yet, the stock market is more resilient than ever and holds steady its gains from the previous weeks. Institutional investors believe in a strong recovery of the US economy, but economic growth may not translate automatically in a market rally.  Is this a turning point for the stock market?

The Biden administration needs desperately sources of money to rebalance the expenses of the coronavirus crisis and a straightforward avenue is to raise long-term capital-gains tax to 43.4% for high income individuals. Tax policy is not the only critical matter in question. A hyper-inflationary scenario becomes more real by day and the position of the US dollar is seriously threatened. A simple way to address this issue would be to trigger a significant and gradual market contraction.  An increase in capital-gains tax rate will inevitably lead to an exit of a significant chunk of individual investors from the stock market. Thus, markets that surfed on retail liquidity such as tech shares could face a resultant market dip.

The Fed has to choose between two equally unpleasant alternatives. On the one hand a hyperinflationary scenario could have unforeseen effects and is not a guarantee for faster recovery. On the other hand a market contraction will generate a slower recovery but would preserve the position of the American currency. The capital-gains tax will hinder the stock market and could give the yard keys back to private equity firms. Private equity institutions have the ability to optimize or bypass taxation through sophisticated schemes and preserve the gains for their investors. The new tax policy could be a game changer for the investment industry and for the relationship between innovative companies and capital flows.

Where does Bitcoin stand in the picture? The leading cryptocurrency is undoubtedly favoured under an inflationary scenario. A market contraction would increase the propensity towards holding fiat currency.  Bitcoin millionaires will be heavily hit by a foreseeable “Biden” tax, thereby explaining the huge wave of selling over the past week. We could witness the return of cash as king.

The tax on capital gains directly affects investment decisions, the mobility and flow of risk capital... the ease or difficulty experienced by new ventures in obtaining capital, and thereby the strength and potential for growth in the economy. John F. Kennedy, 35th U.S. President

Market overview

The stock market does not show any sign of weakness and the volatility index is near a 12 month low. The perspective of an overhaul of the American tax policy does not seem to generate any emotion in equity markets investors. Bitcoin prices plunged below 50,000 USD reflecting the potential outcome that could unravel the foundation of the market rally experienced over the last year. Cryptocurrencies seem more sensitive to changes in fiat money-related policy compared to traditional markets.

Focus:

Amazon

Amazon’s share price increased ten times since 2014 and the first phase of the pandemic outbreak accelerated the growth of the Seattle-based giant. Over the last semester Amazon’s share remained rather stable oscillating around 3,100 USD. Do investors foresee potential for  new developments? Probably, they do not. Amazon seemed to reach at least for the moment its climax and a strategic overhaul may be required in order to unleash additional growth opportunities. Until then a consolidation is under horizon.

Focus:

UiPath

UiPath, the Romanian company specialised in Robotic Process Automation (RPA) made a glorious entry on NASDAQ, through a successful IPO. UiPath shares gained over 20% in the first trading session, thereby being one of the biggest software IPOs. The big winner of this operation is UiPath backer Accel, a leading London-based VC. The investors turned an investment of 172 million US dollars in a few billion in less than two years.

What do investors see in UiPath? The market is betting on the capacity of RPA to optimise and compress the operating costs in big corporates. Automation is the key concept for transforming the way big companies are functioning. COVID is the best proof-of-concept for this transformation. For over 12 months big companies operated and continue to operate despite their staff working remotely, underlining that big processes can be decomposed and ultimately automated.

Focus:

Oracle

After climbing to a record level, Oracle’s share plunged over the last week, significantly underperforming the market. The Texas-based corporation has a business model that is massively challenged by the development of cloud computing.

Traditionally, Oracle was deploying and implementing its robust solution in clients’ environments. The implementation has been generating consistent income that fuelled the growth and the success of the company. The old business model faces not only a significant mutation but also an increasing competition from emerging technologies.

Oracle is at cross-roads and like all old-timers from the technology space it may need to change to compete with the generation of unicorns.

Market outlook

The Dow Jones ended the week above 34,000,  showing resilience amid a foreseeable capital-gains tax increase. Bitcoin dipped below 50,000 USD  but managed to recover and climb above the psychological level. The contraction in Bitcoin price could generate technical sales and could push the crypto market into negative territory. This scenario is even more probable amid signs the market is overbought.

Brent Crude remained in the same price tunnel around 65 USD, and the likelihood of a further price progression faded away despite a foreseeable accelerated economic recovery.

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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