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Worthless

By Marius-Cristian Frunza
Weekly Briefs

Staying home, watching Netflix, working remotely on Zoom, buying shares on eToro, getting checks from the government or big corporates… The pandemic made dreams become a reality for many people. Nobody cares about who will pay the cost of dreaming or when dreams could turn into nightmares. The unprecedented money supply injected in the financial market as well as in the real economy to extend the dreaming period starts to raise questions. The dream goes into its REM phase. Rapid Economic Meltdown...

One of the key indicators of the available monetary supply is the M2 measure aggregating cash, checking deposits, and instruments easily convertible in money. The M2 metric in the United States increased to 19,4 USD trillion in January 2021 from 15 USD trillion in March of 2020. Thus, 25 percent of the US dollars supply was printed since the inception of the coronavirus pandemic. Most of this excess supply helped financial markets to avoid a massive crash, but a consistent amount landed into the real economy through stimulus checks. Printing and devaluing money is the easiest way out of a systemic debt crisis. Following the learnings of traditional economic theory, this glut of money should increase products’ prices and generate significant inflation. Moreover, many analysts point that currency devaluation is the only viable strategy for the US and the EU to deal with the level of their public debt reaching all-time highs.

Cash is trash. The leading narrative underlining that money is worthless motivates investors to empty their savings accounts and to buy stocks, cryptocurrencies or other securities. Nevertheless, this scenario should be taken with a grain of salt. A significant devaluation of the leading currencies could have unexpected consequences. For example, a devaluation of the US dollar would push the holders of Treasury bonds to sell them, thereby creating havoc on the debt market. Moreover, currencies like the Chinese yuan or the Russian ruble should appreciate significantly under this scenario.

Retail investors should not forget that the dollar is first and foremost trust. The value of the US dollar is nothing else than trust in the United States’ role as a global economic leader. Can the US function without trust?

Evolution of the M2 Money Supply in the United States
Cash is trash. Get out of cash. There’s still a lot of money in cash. Ray Dalio, founder of investment firm Bridgewater Associates

Market overview

After a bearish start, the leading stock indices ended the weak into positive territory. Investors bet on a strong recovery that is expected to generate fast economic growth, especially in the US. If the vaccination strategy shows its results, the resultant confidence could accelerate the recovery.  The volatility rebounded amid a significant dip in the cryptocurrency market.

Forex:

Euro is stable

Evolution of the M2 Money Supply in the Eurozone Area

Money supply (M2) In the Eurozone area increased to 14 trillion euros in January 2021 from 12,5 trillion euros in March 2020, representing a growth of 10%. Overall the European Central Bank increased the money supply, but at a slower pace compared to its American peer. Thus, markets perceive the European currency as stable and with a better perspective than the US dollar. Central banks are running a quest for the optimal money printing strategy. Too much money supply could weaken the value of the currency, but less money could translate to a slower recovery.

Forex:

Brazilian Real in Real Trouble

Brazil is one of the most affected countries by the pandemic. Over 300,000 persons lost their lives amid the several waves of infections. 2020 was a rough year for the Brazilian Real, which depreciated by 30% to the US dollar.  The turmoil does not end and over the past week, the real dipped amid a weak economic forecast and a peak of daily deaths related to coronavirus.

Focus:

Discovery Inc

After one year of strong growth, Discovery Inc., the leading American television channel moved into murky waters. The competition with the web-based streaming platforms is rude and traditional media companies have a rough time keeping up the pace. Discovery Inc along with ViacomCBS Inc had a difficult week. Discovery’s share dipped by 45% amid a wave of investors’ distrust. TV companies are trying desperately to launch new products including streaming services and web-based content. Nevertheless,  platforms like YouTube and Netflix have built a strong momentum and they sit currently at the top of the trophic chain in the media jungle.

Focus:

Zoom

The generalized work-from-home and social-distancing policies implemented by most companies brought a strong momentum for all providers of solutions facilitating the virtual interaction. Zoom is one of the biggest beneficiaries of the digitalization of human interaction triggered by the pandemic outbreak.  Zoom’s share rocketed throughout 2020 and picked in November. Since then, the San Jose based company entered a declining pattern.

The sudden growth came with many advantages but also with inconveniences. The big problem for Zoom is that its foreseeable development is limited. Its market share is already consolidated and generating additional streams of revenue will come at a cost. Moreover, leading corporates have already in place a back to office strategy, thereby diminishing the use of platforms like Zoom.

Market outlook

The Dow Jones ended the week above 33,000,  on a positive trend compared to last week. While a market contraction is still probable, the inflow of optimism across equity markets makes it less likely to happen in the short term.

Bitcoin retreated below 51,000 USD after a massive dip but ended the week just above 55,000 USD.  

Brent Crude remained in the same tunnel around 64 USD and the likelihood of a further price progression faded away amid a ravaging third wave of coronavirus infections in Europe.

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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