Tuesday Talk: Vaccinations Up, COVID Cases Down, Market Correcting
While vaccinations are on the rise and COVID-19 cases coming down in the U.S. and Europe and as President Biden marks 500K plus deaths from the virus the market appears to be in a corrective mode.
On Monday the S&P 500 closed at 3,876, down .77%, the Dow Jones Industrial Average closed at 31, 521 up .09% and the Nasdaq Composite closed at 13,533, down 2.46%. Currently S&P futures are down 14 points and Dow futures are down 76 points, while Nasdaq futures are trading about 160 points lower.
Things across the pond are somewhat similar. Concern about inflation and the strength of the Euro is offset by cautious good news about the reopening of schools and businesses in the U.K.
TalkMarkets contributor Martin Essex writing in FTSE 100, FTSE 250 Outlook Improves After UK Unemployment Data And Roadmap notes that investors should be on the lookout for a continuation of the rally in the FTSE due to signs of recovery in the labor market.
"The headline UK unemployment rate edged up to 5.1% in December, as expected, but data released early in the European day Tuesday also showed that the number of people claiming benefits dropped by 20,000 in January, rather than increasing as analysts had predicted. The numbers add weight to the idea that the UK economy is now on the way to recovery and that should bolster both the FTSE 100 and the FTSE 250 indexes of London-listed stocks, particularly after UK Prime Minister Boris Johnson’s so-called four-step roadmap to ease coronavirus restrictions, unveiled Monday, was broadly welcomed for its slow and cautious approach."
In The ECB And The Return Of Inflation, Carsten Brzeski notes that inflation in the Eurozone is a happening thing, with one of the drivers being a rise in energy prices.
"Eurozone inflation in January was just confirmed at 0.9% year-on-year, the highest level since February last year. Core inflation stood at 1.4% YoY. Higher energy prices, some supply-side disruptions and bottlenecks as well as higher prices for services are the drivers behind higher headline inflation in the eurozone. The divergence across eurozone countries is high, with headline inflation ranging from -2.4% YoY in Greece to 1.6% YoY in Germany and the Netherlands - a divergence which doesn’t make the ECB’s life any easier."
Brzeski finds signs that indicate the current bouts of inflation in the eurozone are "cost-push".
"To understand the ECB’s reaction function to higher inflation (expectations) and yields, it is important to look at the nature of these inflation developments. In fact, there are two types of inflation, the “cost-push” inflation, driven by temporary one-off factors, and the “demand-pull” inflation, with too much money chasing too few goods as a sign of an overheating economy. “Cost-push” inflation can actually be considered as being deflationary, reducing purchasing power. This is why the ECB will look through these kind of temporary and technical inflations spurts. It is the “demand-pull” inflation which the ECB will monitor closely.
In conclusion he expects the ECB to keep tabs but not take any immediate action.
"For the time being, the ECB will focus on taming any inflationary expectations and speculation with words. However, the difficulty of this challenge is reflected in the fact that over the last few weeks the ECB has come up with a series of verbal interventions, warning against premature normalising of monetary policy, focusing on financing conditions, talking about real rates and finally emphasising nominal bond yields. All of this makes it harder to read the ECB’s reaction function but at least it shows that the ECB has become aware of its newest challenges."
Contributor Philip Hopf asks the question, Is The Euro Dying? Analysis Of EUR/USD And EUR/GBP. Hopf asks the question in a rhetorical way. He gives a short history of how the Euro has behaved so far (since inception) under the throes and stresses of the various financial crises over the last couple of decades. He says that the task at hand is to manage the currency and not be concerned about its demise.
"The task now is to manage the euro as best we can; we think a return to local currencies is out of the question. We also do not share the opinion of all the crash prophets who have been conjuring up the euro's demise for years. In reality, the system is far more dynamic and complex, so one parameter getting out of hand will not be sufficient to sink the ship. We therefore consider the not-so-popular euro to be more robust than many would assume.
Overall, we expect a stronger euro, which will also translate into rising rates against other currency pairs such as EUR/USD and EUR/GBP. "
Hopf also gives his outlook for both of these important Eurocentric pairs:
"For the exchange between Euro and USD, we expect to return to an upward movement to reach marks past $1.25 in the course of the yellow wave 5. The according setup seems to be in progress already. Imminently, we have to expect that the bears pull the price back to around $1.20. However, as long as we do not fall under the preliminary low point at $1.19524, we believe that the green wave iv's corrective movement is completed. It remains exciting, and adding a long position in the EUR/USD should be on everyone's watchlist. The indicators also support this, more specifically the RSI and MACD. In the longer-term, we expect EUR/USD to rally towards $1.40, before a more significant sell-off sets in, which could move us towards parity."
Not sure we will see parity any time soon, unless the sky falls and there is some unlikely event in the U.S., like the Biden stimulus plan not getting signed into law.
"The EUR/GBP course is continuing its journey down South and is, thus, on the right track. Because of the stops, we had to forgo further shorting in this market. Now, we are concentrating on positioning ourselves on the long side in the area around 0.85 GBP, where we expect a rather longer-term turnaround in the motion. In the course of this trend, the bulls might be able to expand to new peaks above 0.95 GBP. Around 0.86 GBP is the zone where it gets exciting. Therefore, the bears still have some time to dominate, which is also supported by the indicators. In the mid-term, we see the Euro gaining more value towards the British Pound."
Check out Hopf's article for the charts which plot these ideas. It remains to play out in 2021 which economy rebounds stronger. A brexited UK or a Eurozone recovering in fits and starts across the continent.
Elsewhere TalkMarkets contributors give us some insight into two of this year's hottest speculative assets, Silver and Bitcoin.
Jason Hamlin writing in Top Silver Stock Pick For 2021 is straightforward about his predictions for the shiny metal.
"We are expecting a breakout year for silver in 2021. In fact, we think the silver price will easily make a new high above $50 with the potential to challenge $100 within the next year or two."
Hamlin provides the background information which you may have seen in other places as well, as to why silver (SLV ) is suddenly so speculative in 2021.
"While the fundamental focus for silver is usually the investment demand, jewelry demand, and its use case as an inflation-hedge, we see the industrial demand component being a key driver of the higher price over the next few years. Demand growth in EV batteries and clean energy applications is expected to tick higher...We are forecasting that the 7% decline in industrial demand for silver in 2020 will turn into an increase in industrial demand in 2021. These supply/demand fundamentals will become clearer over the course of the year, so we think it is best to be ahead of the curve and buy while prices are still so low."
I'm bringing Hamlin's piece to your attention because we should all be careful when looking at speculative assets for investment purposes. In his article Hamlin suggests some silver mining stocks as one way to go. He explains it this way:
"The reason that we are bullish on silver miners is that they can offer investors leverage of 2x to as much as 10x during strong bull runs. This is because the companies that mine silver have a large fixed-price component to overall costs and most of the price gains go to the bottom line."
He further advocates smaller miners rather than large one as he sees a bigger potential for gain in those companies as some of the larger miners derive smaller portions of their revenues from silver. He explains that with a chart showing % of revenue from silver for the larger silver miners.
If you have been thinking about silver read the article to get another take on what you'll be getting into.
Closing us out today, another commentary on what is happening with Bitcoin (BITCOMP). Got to be one of the best roller coaster rides out there. There are many different answers about when do get on and when to get off depending on who is doing the investing. TalkMarkets contributor Shivdeep Dhaliwal assesses the latest action in Bitcoin Drops Below $50K After Elon Musk, Janet Yellen's Bearish Comments.
"The apex cryptocurrency fell as low as $48,967.57 in the 24 hours trailing period to press time. The cryptocurrency slump comes after Yellen warned Monday that BTC was an inefficient way to conduct transactions. Speaking at the New York Times DealBook conference, Yellen said, “It’s an extremely inefficient way of conducting transactions, and the amount of energy that’s consumed in processing those transactions is staggering.”
Many readers are also aware of Elon Musk's (TSLA) remarks about the high prices of cryptocurrencies, (which perhaps not unsurprisingly for Musk after he helped run up the price of Bitcoin with his recent huge purchase of the coin).
"The Tesla CEO also weighed in on the high price levels at which BTC and ETH were trading on Monday in a Twitter exchange with gold bug Peter Schiff.
That said, BTC & ETH do seem high lol
— Elon Musk (@elonmusk) February 20, 2021"
So what is the current state of affairs and why does it matter? Because despite both Yellen's and Musk's remarks, institutions have been turning to Bitcoin and other cryptos and as Dhaliwal concludes:
" As of Monday (Feb. 22), despite, the fall in cryptocurrency prices, Tesla’s $1.5 billion investment in BTC has returned nearly 70%.
Another company that bet big on BTC, MicroStrategy Incorporated (MSTR) has turned its $1.15 billion investment into $3.9 billion.
Jack Dorsey-led Square Inc (SQ) which purchased BTC worth $50 million has added $208 million in value to its investment, as of Monday.
BTC has appreciated 73.08% on a year-to-date basis, while ETH has run up 124.09% in the same period."
At the start of trading today Dhaliwal notes that "Bitcoin traded 8.94% lower at $50,974.62 at press time.The second-largest cryptocurrency by market cap, Ethereum (ETH-x) traded 13.28% lower at $1,627.99."
As we head toward the end of February I'll leave you with a big Caveat Emptor and wish for more progress in Washington on the stimulus front, more progress across the nation on the vaccination front as well as some warmer weather.
Comments
