Legends of the Fall
September marks in the Northern hemisphere the passage towards the cold season. While the US economy seems to have started the second half of the year with strong momentum, there are several signs of latent unqualified risks that could undermine the recovery. Will the fall bring sadness to financial markets?
One year ago, we thought that by now, the pandemic would be just a distant
memory. But, unfortunately, while the stock market saluted the mass
vaccination, the hard facts show that the economic recovery and the current
state of households’ finances are anything but good.
The Biden administration decided to extend for an additional three-month the federal evictions moratorium. The ban on eviction, which was introduced by the previous White House administration in September 2020 and rolled over several times, expired last week. The moratorium aims to protect cca. 90% of American tenants owing back rents. The extension came unexpectedly, one week after the White House said it could not keep the eviction ban in place due to a US Supreme court ruling.
How does this move really translate into economic terms?
The roll-over of the federal eviction moratorium shows that the US economy is still in a fragile state, and the big majority of households are facing a real crisis. It also shows that despite all macro-economic and financial data, society is going through an unprecedented deep recession. Compared to previous situations, the current downturn is overwhelmingly silent. The consistent employment increases reported since April do not suffice to heal the severed labour market. In fact, The US, along with most Western economies faces structural unemployment, which has its origins prior to the pandemic outbreak. These long term jobless individuals do not figure in labour statistics, but their fragile finances impact the rent collection rate.
How does this impact financial markets?
Currently, Wall Street does not price in the invisible strata of the society, which are not included in statistics. But, reality catches up in the end, and the foreseeable impact could be massive. The Fed tries to span this impact over a longer period of time, in order to avoid a fall in stock prices. By doing so, they hope to protect the banking and real estate sectors. But sometimes, whomever you don’t let die will not let you live!
You expected to be sad in the fall. Part of you died each year when the leaves fell from the trees and their branches were bare against the wind and the cold, wintery light. Ernest Hemingway, American novelist
The U.S. Labor Department reported the latest employment figures for July, which indicate that the economy added no less than 943,000 nonfarm payrolls, while the unemployment rate fell to 5.4%, thereby beating analysts’ expectations. The market received the announcement with enthusiasm, the Dow Jones climbing above 35,200.
These strong macroeconomic results could incentivise the Federal Reserve to start tapering its asset purchases sooner than expected. If the Fed cuts its bond-buying program, the fixed income market could undergo a massive dislocation that would also impact stock prices.
The European Commission gave earlier this week the green light to Novavax to purchase 200 million doses of vaccine. The contract is conditioned on the vaccine being approved by the European Medicines Agency. The share price of the Maryland-based biotech firm soared by almost 20% following the announcement. Still, it retreated in the next trading session due to news about delays in the FDA emergency use submission. In addition, the company faces serious issues with the supply chain and the fabrication at a large scale of its vaccine, thereby postponing its commercialisation.
Novavax proposes a more traditional technology that does not employ mRNA nor adenovirus techniques. In addition, Novavax’s vaccine is closer to the usual vaccines used to tackle other diseases. Therefore, Novavax may well fill the gap in the market, represented by those who are reluctant to Pfizer and Moderna jabs.
Gamestop, AMC… and now Robin Hood. The memory remains the same. The leading stock trading platform for retail inventors listed its shares publicly. In the first trading session, investors saluted the newcomer. In the following days, things unravel in an unforeseen way. Traders’ appetite for Robin Hood suddenly diminished, and the stock started to lose its traction. Seemingly, the very same investors that got nailed during the Gamestop episode decided to make Robin Hood a meme stock at best.
When everybody thought of hearing its swansong, Bitcoin made a strong comeback over the past month. The structural issues in the crypto-universe are still here, but a positive mood seems to have returns amongst investors. The long-awaited Gold investing frenzy is not materialising, thereby leaving Bitcoin as the sole alternative investment. If the Fed and its peers do not adjust in time their quantitative easing strategies, we could reasonably expect to see Bitcoin climbing above 75,000 USD.
The Dow Jones Index climbed in the last trading above the 35,200 mark. A down to earth conclusion about the depth of the recovery could be made in September. The perspective of non-transitory inflation and a new wave of Delta-variant related infections are putting investors in a risky spot.
Bitcoin’s price soared above 42,000, which could trigger the beginning of a new rally.