Inflationary Calm, PR Crypto by Ray Dalio From the point of view of macroeconomic statistics, the main news of yesterday was the data on GDP in Germany for the first quarter. The data released were even slightly worse than analysts' forecasts. But in general, nothing unexpected - Europe is in recession.
But this did not in the least confuse the buyers of risky assets. Some correction in the commodity markets, coupled with comments from the world's leading central banks, from Christine Lagrade to Fed officials, reassured the markets on inflation. The current consensus among central banks is as follows: it is too early to tighten monetary policy, and the incoming inflationary signals are a temporary anomaly, and in general it is necessary to save the economy, and then deal with inflation.
Stock markets reacted to this with growth, but the cryptocurrency market was rather dull. Even despite the more than aggressive comments from the head of Bridgewater Associates billionaire Ray Dalio, who said that it is better to invest in Bitcoin than in bonds. Quite frankly, an unexpected statement. Hearing something like that from all sorts of hypo-eaters like Mask and Cuban is one thing, but Ray Dalio seemed to be another. But in fact, no, the same thing. The funny thing is that he said this at the moment when bitcoin was quoted at 57K. In the light of the current 35-40K, there is a feeling that Dalio has had a severe form of COVID-19 and his thinking abilities have dramatically subsided.
Oil, meanwhile, is rising amid fears that the US-Iran deal will fail. In our opinion, this is a good opportunity for more expensive sales, since fears today may be replaced by a deal “tomorrow”.
Newsbackground
China against Cryptocurrency and Commodity PricesThe cryptocurrency market continues to experience a fever. As a result, the HSBC head could not resist and said that his bank did not plan to launch cryptocurrency trading or offer cryptocurrencies as investments to clients. Motivation: they are too unstable and lack transparency.
In general, these are very difficult times for the cryptocurrency market. Cryptocurrency mining operators including Huobi Mall and BTC .TOP suspended their operations in China on Friday after Beijing stepped up its efforts to tackle Bitcoin mining and trading. Chinese miners account for about 70% of global mining. Rumors spread throughout the market that Chinese mining pools would start dumping their bitcoins in order to avoid a conflict with the Chinese authorities. This will naturally put pressure on the price of the already bloodless bitcoin.
In general, the Chinese authorities have become more active lately. And one cryptocurrency market is clearly not enough for them. In particular, China has stepped up its fight against soaring commodity prices with the help of a government commission that said there would be "zero tolerance" for "excessive speculation," which it said contributed to the recent rally. As a result, iron ore futures fell like a number of other commodity items. This news fell on an already rather favorable backdrop - this refers to the fears of participants in commodity markets that demand for Chinese commodities has reached a peak, as the country's central bank is gradually limiting the flow of money into the economy, and financing of infrastructure projects is slowing down.
So selling commodities may be a good trading idea, especially from the current clearly overpriced prices. Those who do not want to take unnecessary risks can trade in the foreign exchange market with commodity currencies such as the Australian and Canadian dollars. Naturally, we are talking about selling them.
Week in a Glance: Cryptopocalypse, China Threat, EU RecessionThe past week can definitely be called a week of cryptocurrencies. It's very likely that it'll become the watershed line that separated the unconditional faith on the part of crypto enthusiasts in the market prospects from skepticism about the future of cryptocurrencies. What is the key problem of assets, whose value is radically out of touch with reality? You need blind faith in further growth. As soon as doubts arise, this whole pyramid of illusions begins to crumble literally before our eyes. And then the “Minsky moment” comes, plus technical analysis starts generating sell signals, plus stops start to work, apartments for adding margin to maintain positions run out, and in general, the topic suddenly ceases to be fashionable. We already went through all this at the end of 2017 - the beginning of 2018, but most of the crypto investors were still going to school then, so they don't remember.
And this is not a single case of cryptocurrencies. Consider the Nikola company, for example. Tesla's killer, a new word in electric vehicles and other nonsense, which drove the stock prices to the region of $90 apiece a year ago. So, now they are quoted at $12 and the funniest thing is that nobody needs $12.
And since Tesla has already been mentioned, even 3-4 months ago, the shares were tore and thrown around $900. And now they are sadly slipping below 600. And this is with the growth of sales in the super-promising market. It's just that after $900, $1000 did not follow and that's it. The sense of buying Tesla shares was abruptly gone. What can we say, according to S3, Tesla's short interest as of May 13 was $22.5 billion. That is, it is the most popular stock among shortists in the entire US stock market. Mile Burry alone has bet more than $500 million on its fall (in the form of buying put options) and he has every chance of repeating his success with credit default swaps during the global financial crisis. It is strange that Musk has not released a new series of red underpants. Apparently, he understands that the one who laughs last laughs well.
But God bless this cryptocurrency market, with all the hype around it, it is a dwarf on the scale of modern financial markets. Threats hang over much more serious segments such as the stock market. The specter of inflation is haunting the world. Following the USA, the UK and Germany set inflation records. So the tightening of monetary policies becomes a question of not if, but when. With all that it implies for overheated stock markets.
China is another threat on the horizon. The defaults on bonds in the Celestial Empire are breaking all imaginable and inconceivable records. Just to give one fact: in 2015, when China's stock market crashed, defaults totaled 8.9 billion yuan. In 2021, firms were unable to pay back 100 billion yuan. And the year has not even crossed the equator yet. Considering that the total market size under $15 trillion in the event of a negative scenario will not seem like little to everyone, not just China.
The expectations of the markets for a quick recovery of the world economy have not yet come true. Europe, for example, slid into recession again in the first quarter. A strange such recovery is being obtained with negative GDP growth rates.
Inflation & Unemployment, Chip Shortages and Musk's New DogetwitThe cryptocurrency market was optimistic yesterday. Everyone pretended as best they could that the environment was an incomprehensible anomaly, which it is better not to remember. Double-digit daily growth rates across virtually the entire spectrum of the market indicate quite definitely that the memory of today's investors is at the level of a goldfish (according to the old myth of 3 seconds).
It would seem that just a couple of days ago, everyone cursed Musk with his tweets, which in many ways contributed to the crypto-pacalypse on Wednesday. But already yesterday he was again worn in his arms, especially by dogecoin fans, who received another hype injection from Musk. Although there is a feeling that the eco environment of his Twitter readers is becoming more and more self-contained. At least for the uninitiated, it is difficult to understand what was so positive for the dogecoin in yesterday's tweet: "How much is this doge in the window." In our opinion, there is no point in tweeting, or in the current prices for dogecoin, or in Musk's attempts to catch up with the hype around DOGE.
Meanwhile, with each new portion of macroeconomic data, the inflation problem becomes more and more material. For example, in April producer prices in Germany rose by 0.8% MoM and 5.2% YoY (levels not seen since 2011). Tellingly, the previous period of similarly rapid growth in manufacturing inflation in Germany (2010-2011) ended with an increase in ECB rates, after which inflation began to decline. Against the background of this information, the yield on German bonds climbed up (reached a two-year maximum). Thus, the markets are trying to discount against the future tightening of the ECB's monetary policy. The first step of which, obviously, will be to reduce the volume of purchases of bonds.
On the other side of the Atlantic, Ford has decided to temporarily shut down a number of its factories. The reason is the global shortage of semiconductor chips. According to the CFO, Ford expects to lose about 50% of planned production in the second quarter due to chip shortages. And Ford is not an exception to the rule. It is worth waiting for similar news from other automakers.
Cryptopocalypse, Inflation and Oil ReservesThe main event of yesterday is without a doubt the apocalypse in the cryptocurrency market. In our opinion, everything that happened was more than expected (not in terms of the time of occurrence, but the final outcome - the collapse of the bubble in the cryptocurrency market), but many were taken by surprise.
The formal reason for the panic wave was a message from the Bank of China about a ban on financial institutions from offering services related to cryptocurrency assets. But if our readers follow the cryptocurrency market, they know that there is nothing fundamentally new in this information. China has long and consistently opposed cryptocurrencies and other obscurantism under the guise of a revolution in the world of finance.
So it's not China at all. And not in the Mask, and not in Tesla, and not in ecology. It's about the essence of things. And the bottom line is that the intrinsic value of cryptocurrencies is virtually zero. This means that any price other than 0 is already expensive. Yes, the statement is largely controversial and you can come up with a lot of arguments in favor of the non-zero cost of a single cryptocurrency, ranging from the cost of mining to functions that have fundamental value and utility. But in any case, these hundreds and thousands of percent of growth cannot be substantiated with anything objective. The discussion will still slide into the prospects, the future, new technologies and other dreams of crypto enthusiasts.
In total, you should not think that yesterday's prices on the cryptocurrency market are the bottom of the abyss, into which everyone has looked. The abyss is sure to look back.
But God bless the crypt. The inflationary spiral is starting to unfold around the world. Following the USA, we have the highest rate of growth in production prices in the UK. Inflation is also growing in Canada, at a rate that exceeds the expectations of experts. This means that the era of tightening monetary policy is not far off. In this light, one should not be surprised by the sell-off in the stock markets. As soon as the central banks make it clear that they have heard the inflationary signal, we will see a full-fledged panic. In yesterday's minutes of the FRS, only the first signs of this have appeared (discussion of the reduction of the asset repurchase program), so it is too early to panic.
Prices crashed yesterday on the oil market. Again, nothing unexpected. But somehow the voices about 100 oil were abruptly quieted down. The formal reason is the growth of reserves in the United States, an increase in production in Iran. But all these things are formal, as is the case with the cryptocurrency market. The essence of things is that prices have climbed too high relative to the reality that exists in fact, and not in the minds of optimists.
Eurozone Recession, Burry vs. Tesla and Oil at 25From the point of view of macroeconomic data, the main event of yesterday was the publication of the Eurozone GDP information for the first quarter. GDP fell by 0.6%. At the same time, the growth was also negative in the previous quarter. It means that the European economy has again entered a state of recession. And for the second time in a year, that is, the so-called "double recession". Against this background, the breakdown of the resistance of 1.2170 by the EURUSD pair looked somewhat strange, as did the new highs of European stock indices.
Tesla continues to have a cloud over it. The Gigafactory near Berlin will not be opened on July 1, and it is not a fact that it will be opened at all in 2021. Bitcoin is pouring in, and if Max did not lie, saying that the company did not sell a single token, then some are in trouble. And then Michael Burry (played by Christian Bale in The Selling Game) started a new sell-off. But this time not against the US mortgage market, but against Tesla. And if last time he had to invent credit default swaps, this time he used the good old put options on 800,100 Tesla shares, or $534 million.
The final straw that pushed Burry to take this step was Tesla's dependence on regulatory loans for profit. While a couple of years ago this fact could be overlooked, now that more and more automakers are producing their own electric vehicles, fewer companies need to acquire environmental regulatory credits from Tesla in order to comply with environmental regulations. This means that Tesla's financial position becomes extremely vulnerable.
The International Energy Agency (IEA) recently shared its strategic vision of the oil market. It was noted that the world needs to immediately stop developing new oil and gas fields in order to be able to achieve zero emissions by 2050. At the same time, by 2030, electric vehicles should make up 60% of the world fleet. What does this mean for oil prices? According to the IEA, oil prices should fall to $25 per barrel by mid-century.
Musk's Swing, Japan GDP and China Retail SalesTraditionally, the most interesting thing in the financial markets happened yesterday in the cryptocurrency market. Elon Musk continued to mock its members. Monday kicked off with massive crypto sales amid information that Tesla may have sold all of its Bitcoins. True, on Monday, Musk said that the company had not sold a token. But his words raised little confidence, because Bitcoin continued to trade below 45K. Common sense suggests that it is unlikely that a person sitting on 1.5 billion in bitcoins will actively contribute to reducing their value.
And in general, the general fundamental background is not so that it contributes to the growth of demand for risky assets. That is, they already habitually continued to buy them (see the dynamics of stock markets), but the data on Japan's GDP and retail sales in China reminded the markets that it is not worth trying too early to discount for something that does not yet exist and may not exist (meaning record economic growth rates).
China has, as usual, demonstrated double-digit growth rates of retail sales in the country. It would seem a success, but analysts expected growth by almost 25%, but in fact it turned out to be 17.7%.
Well, Japan once again reminded that the first quarter for the world economy as a whole turned out to be a very disastrous one. Despite all those trillions of incentives, both fiscal and monetary, the country's GDP at the end of the 2020 fiscal year decreased by 5.1% (experts had expected a decline of 4.6%). In relation to the previous quarter, GDP also showed a decline and also turned out to be worse than analysts' estimates.
Meanwhile, the pandemic in India continues to rage and demand for oil in the country, one of the largest oil consumers in the world, continues to fall. Automotive fuel sales in the period from May 1 to May 15 fell by a fifth compared to the previous month and by about 28% compared to the same period in 2019. So the current $ 70 a barrel of Brent oil is a bit too much. This means that the asset can be sold.
Week in a Glance: US Inflation, Scotland, Pipeline HackingThe past week was very busy and volatile. For the cryptocurrency market, it started with the shouts of DogeCoin owners "we will all die" following Musk's performance at the Saturday Night Show and the fall of this 'currency dropout' by 30%. For crypto enthusiasts, the week continued with curses towards the head of Tesla after he announced that Tesla no longer accepts Bitcoins as payment for the company's products and dropped Bitcoin by 15%. Well, Musk finished off Bitcoin already at the weekend, when he hinted that Tesla had sold all his Bitcoins.
Tellingly, there were no curses towards Musk and accusations of market manipulation while he contributed to the growth of cryptocurrencies. And after a couple of resounding slaps in the face, everyone suddenly remembered that Musk's tweets were after all manipulation of market prices and it was time to bring him to justice for this.
For the UK, the start of the week turned out to be potentially extremely gloomy. This refers to the results of the elections to the Parliament of Scotland, where the majority was received by the parties in favor of the independence of Scotland. Judging by the polls, if we manage to hold another referendum, then Great Britain will have minus 8% of GDP and other problems due to the fact that one country in the Kingdom will become less.
For the oil market, the week also started with a rich news about the hacking of one of the largest US oil pipelines. The US domestic market for petroleum products has not seen such a collapse for a long time. But at the end of the week, the problem was solved (according to rumors, they paid 4-5 million to hackers).
Well, the main event of the week was inflation data from the United States. Consumer inflation reached its highest levels since April 2008, and industrial inflation - over the entire history of observations. Naturally, the markets rushed to revise forecasts for the Fed rate hike, which triggered a wave of panic in the stock market. However, by the end of the week, the panic subsided somewhat, since there was an excuse for increased inflation - the whole point is in the underestimated base, which was formed a year ago. In general, they decided that this was a local anomaly, and not a systemic problem. But we all understand that this is not like that. The economy has just demonstrated that the basic laws have not gone anywhere - you throw money right and left, get ready for inflation.
US Inflation (Part 2) and New Economic RealityAfter the data on the US consumer inflation, published on Wednesday, yesterday the markets doomily expected the numbers on the industrial inflation. It is doomily because if in the case of consumer inflation it was possible to count on a moderate rise in prices, then there was no hope at all with the production inflation against the background of many years of records in the commodity markets and even historical highs for a number of goods.
As a result, the year-on-year growth was 6.2%. 3 times higher than the Fed's target(!). This figure has once again reminded that economic laws have not disappeared and continue to function. Now all eyes are on the Fed.
In the meantime, the markets are waiting for the Fed's reaction, let's talk about the new economic reality, or rather, why the US economic recovery will most likely not meet the markets' expectations.
During the pandemic, whole parts of the economic mechanism, if not out of order, then were already upset. For a number of assets required for economic recovery, problem areas have formed.
Consider, for instance, the latest NFP numbers. The data came out almost 4 times worse than forecasts, not because there were problems on the demand side (on the contrary, the number of open vacancies is breaking records). The problem was in the supply of the labor market: the level of participation in the US labor force did not come close to the pre-pandemic levels. As a result, 10 million jobs have not returned to the economy, yet, and will clearly not return in the near future.
But there is still a shortage of chips that will slow down entire industries (for example, automakers will produce tens of billions of dollars less because of this in 2021). The sharp rise in timber prices is hampering the recovery of the construction industry. A shortage of packaging materials and a sharp rise in prices for them will become a problem for retail. And there are many more such examples.
The Dollar Strikes BackThe US inflation data publication was the main event yesterday. The markets were really scared of this. According to Bank of America, mentions of inflation in corporate income statements were up 800% from a year ago. And search interest in inflation, according to Google Trends, is at its highest.
As a result, the worst fears became reality. Consumer inflation in the United States reached its highest level since April 2008 (4.2% year-on-year). And the core CPI, which excludes food and energy prices, rose 0.9% from the previous month, the largest monthly increase since the early 1980s.
Markets, of course, rushed to revise their estimates on the timing of the Fed's rate hike, the yield on US Treasury bonds shot up, the stock market went down, the dollar in the foreign exchange market struck back at all offenders for the disastrous NFP figures. In general, everything happened very logically.
In general, buyers in the US stock market should strain. It is possible that hard times are just beginning for them. Yesterday, for example, a flash crash occurred in the Taiwan stock market, with the Taiex Index falling 9.8% during the day (the worst daily performance in its 54-year history). Insanely inflated quotes against the background of active use of leverage is an extremely explosive mixture. But in the United States, the nature of price increases is by and large the same.
However, the markets are still far from returning to common sense. What is at least the growth of a new token called "Internet Computer", which in just a couple of days from the moment of its launch received a capitalization of $45 billion and took 8th place in the cryptocurrency market by this parameter.
OPEC Report, Seychelles, US Inflation, and UK GDPThe main news of yesterday can be considered the publication of the monthly OPEC report. Although there was nothing supernova about it. Previous estimates were left unchanged. And despite the decline in US oil reserves (API data), oil did not grow. The reason is the pandemic situation in India and the possible development of events in this regard. Let us explain the thought.
In the Seychelles, meanwhile, the number of cases is growing. It would seem, well, who cares about these islands. But the root of the anger is that 37% (!) Of cases of new diseases occurred in people who were already vaccinated (!). Recall that at the start of the week, WHO announced the Indian strain of the virus (with a triple mutation) as a potential threat to the whole world. If this mutation really breaks through the vaccination defense as easily as it happens in the Seychelles, then the world is in for a very unpleasant surprise in the foreseeable future.
Today is interesting because of the data on the UK GDP, as well as the US inflation statistics.
Further unwinding of the inflationary spiral in the US may finish off the US stock market, which this week does not feel very well without it.
As for the UK GDP, the data is likely to come out weak, since in the first quarter the country was mostly in a lockdown. And the economic price of a lockdown could have been estimated a year ago, when the country's GDP fell by 20% in the second quarter. Obviously, we will not see anything of the kind on Wednesday, but we cannot count on a sharp rise in the quarterly indicator.
The reasons for this pessimism against the backdrop of the seemingly successful vaccination campaign in the UK (more than half of the population has already been vaccinated): many restaurants, theaters and shops remain closed, and the migrant workers who served them fled tens of thousands to their countries of origin during the lockdown... Even as most of the bans expire in June, new border restrictions following the UK's exit from the European Union will make it difficult for many to return. That is, even if work appears, there will be no one to work. Last week's NFPs are a direct confirmation of this idea.
Doge Falling, Commodity Boom and Scottish IndependenceThe main event of the weekend was the epic firing of the Doge token after Musk jokingly (or seriously) confirmed the idea of the host of the Saturday Night Show that the cryptocurrency was a scam. A drop of 30% is a very serious reason to think about the future of the crypto-currency-meme, which, thanks to Musk's PR, almost reached the moon (meaning the price of $1 per token).
And then the head of the Bank of England recalled the consensus opinion among financial professionals about cryptocurrencies: "Cryptocurrencies have no intrinsic value and those who speculate with them need to be prepared to lose all their money."
Note that the demand for cryptocurrencies is one of the derivatives (perhaps the most extreme case) of the overall rally, when an excess of cheap money provokes a rise in prices across almost all ranges of financial markets.
Let's now cast a glance at the commodity markets for example. The Bloomberg Commodity Index has updated its highest levels since 2015. At the same time, the price of iron ore on Monday soared by 10%, and copper renewed its all-time highs.
The pound was also aiming to reach the highest levels since spring 2018 yesterday. On the one hand, the basis for this agility was provided by the dollar, weak after the disastrous data on the NFP. On the other hand, the markets are counting on a sharp growth in the UK economy in connection with the country's exit from the lockdown.
What would happen to the UK economy if Scotland leaves it? The Scots generate about 8% of the Kingdom's GDP. And this question is not so hypothetical. The fact is that last week's elections allowed the political parties advocating the independence of Scotland to gain full control over Parliament (72 out of 129 seats). Their next step is obvious: an attempt to hold a referendum on independence. And although Johnson will obviously refuse, it is unlikely that this will stop the Scots. In any case, we should expect a permanent negative background for the pound on this issue in the foreseeable future. But Britain has not yet recovered from Brexit and the pandemic. In general, a pound at 1.41 is a fair price to sell it in the current realities and prospects.
Week in a Glance: NFP, Comments by Yellen & the Bank of EnglandThe main event of the past week was the publication of a stats block on the US labor market on Friday. It seemed that nothing boded ill: the figures from ADP, although they came out slightly worse than forecasted, turned out to be excellent (+ 742K), in addition, the initial applications for unemployment benefits were pleasantly surprised (decreased significantly).
But the NFP figure openly stunned the markets: 266K against the forecast of 978K is, if not a complete failure, then a cold shower for all those hotheads who were waiting for a sharp recovery in the US economy in the second quarter after a more than successful first. The markets, however, were not very upset, explaining to themselves what was happening not so much with the problems with the demand for labor, as with the supply: they wanted to hire, but there was no one.
Is it worth it after that to put an end to the future of the US economy? Definitely not. These data are too discordant with all the splendor that we have observed recently both in macroeconomic statistics and in the reporting season.
Janet Yellen delivered another blow to the bulls in the US stock market. The former head of the Federal Reserve and the current US Treasury Secretary spoke about the rise in interest rates. Uniform panic began in the markets. True, Yellen almost immediately explained that she was misunderstood and all that.
An important event of the week was the announcement of the results of the Bank of England meeting. In general, the parameters of monetary policy were left unchanged. At the same time, the Central Bank raised its own forecasts for the growth rate of the UK economy in 2021 from 5% to 7.5%, but at the same time lowered the estimates for 2022 from 7.25% to 5.75%.
Another important outcome of the meeting - the Bank of England has slowed down the pace of its stimulus program: the volume of weekly bond buybacks will be reduced to 3.4 billion pounds from the current pace of 4.4 billion pounds per week. True, the Central Bank hastened to declare that this is not a tightening of monetary policy.
This week is interesting both by the continuation of the reporting season and by data on consumer inflation in the US, as well as retail sales. In addition, tomorrow's news on GDP growth rates in the UK will be important for the pound.
Who Buys in the US Stock Market and Getting Ready for NFPYesterday, the main event was the Bank of England meeting results' announcement. The central bank raised its forecasts for the UK economy growth rate in 2021 from 5% to 7.5%. But at the same time, the estimates for 2022 were lowered from 7.25% to 5.75%. But the main result, perhaps, is still the news that the Bank of England has slowed down the pace of its stimulus program: the volume of weekly bond buybacks will be reduced to 3.4 billion pounds from the current pace of 4.4 billion pounds per week. True, the Central Bank hastened to declare that this is not a tightening of monetary policy.
The pound was in no hurry to grow on this news. Elections in the UK, including members of the Scottish Parliament, have become a concern this week. If in the new Parliament there is a critical mass of those wishing to fight for independence (and the probability of this is estimated by banks at 15-30%), then we witnesses another referendum for Scotland's independence, and this time there is a big chance of its success (if you believe the results polls that consistently show an Scotland's secession supporters excess from the UK).
Bank of America has recently released interesting figures for the US stock market. As it turns out, hedge funds have been very active in the US stock market in the past few weeks. By and large, the only group of customers buying stock were retail customers. All this very clearly fits into our understanding of what is happening: professionals tend to eschew the purchases or actively sell, and only amateurs continue to chase easy money and buy on an overbought market. This is a clear sign that the bubble is just around the corner.
The main event of this week and today is the publication of statistics on the US labor market. Of the entire data set, which includes unemployment, wage growth and the number of non-farm payrolls (NFP), today everyone will be interested in the last indicator. Markets count on a figure of a million or more. Considering that yesterday's initial applications for unemployment benefits showed a sharp decline in the indicator for the week, there is a great chance of seeing a number with 6 zeros in the NFP column.
Data from ADP, Inflation and the Bank of EnglandThe main event of yesterday was the US employment data from ADP. Since the US economy is now recovering by leaps and bounds, everyone is waiting for new records. In this regard, yesterday's data came out relatively ambiguous. That is, the figure of 742K is simply an excellent result, the best since September 2020, and also 50% higher than the previous one. But, on the other hand, the average forecast of analysts was around 800K. So there is also reason for disappointment. Well, by and large, these data only added intrigue to Friday's official statistics. So,, we are waiting for the NFP numbers.
Commodity markets continue to break records and one of the basic indicators of the market as a whole, the Bloomberg Commodity Index, approached the highest values since the commodity super cycle. The largest increase in prices was demonstrated by food raw materials such as soybeans and corn (40% +), as well as energy raw materials - gasoline and oil (about 40%). The outsiders are gold and orange juice.
A natural consequence of this will be an increase in production prices, and consumer prices will rise no less naturally after them. That is, inflation will transform from a hypothetical threat into a material threat in the foreseeable future. Actually, this is what Yellen tried to attract the attention of the markets to on Tuesday.
The main event of the day will be the announcement of the Bank of England meeting results. In the context of growing fears about inflation, each meeting of the leading central banks will acquire more and more importance. Because sooner or later it will be necessary to tighten monetary policy. We wonder who can’t stand it first. The most obvious candidates (based on the pandemic situation and, accordingly, the timing and speed of economic recovery) are the Fed and the Bank of England. That is why it will be very interesting to hear the comments of the Central Bank today.
Best Assets of the Month, Pfizer and Yellen's SurpriseIf you look at the various asset classes' profitability in April, a rather interesting picture emerges. The absolute leaders were commodity markets and real estate securities. The US stock market has only the third position. The outsiders were cash and, in particular, the dollar. It once again confirms that keeping money in the cash is a relatively unprofitable undertaking. In addition, it is extremely important to monitor what is happening in the financial markets in order to determine the class of assets that should be emphasized.
Speaking of May, we've already noted that the old adage “sell in May and leave the market” has a good chance of being confirmed this year, at least judging by the reaction of the US stock market to the exceptionally excellent reporting of US corporations.
Yesterday Jannette Yellen (the US Treasury Secretary and former Fed chief) gave the first signal that a tightening of US monetary policy was just around the corner. When speaking at the Future Economy Summit, she said: "The interest rates may happen to rise slightly to keep our economy from overheating." The fall of the Nasdaq Index by 300 points literally in 3 hours is a clear confirmation that the signal was heard.
As for the commodity markets, their further growth is questionable for us, both because of the general overbought in the market and because of the situation in India.
An increasing number of Indian states are going into lockdowns, and an increasing number of countries are trying to isolate themselves from India. Even lions in zoos in India began to get sick with coronavirus en masse, what can we say about people.
Against this background, one company continues to look extremely undervalued - Pfizer. The pharmaceutical giant released excellent quarterly financials yesterday. Profits are much higher than analysts' forecasts, and earnings are higher than expected. Vaccine sales in the first quarter generated an additional $3.54 billion in revenue and accounted for a good quarter of revenue. The company's plans for revenues have grown by 50% (!) from $15 to $25 billion. And the company plans only to increase this result. In 2022, it is planned to sell at least 3 billion doses. In general, we buy Pfizer shares - they are still very cheap.
The main event of the day will be the US employment data publication by the ADP. Yes, official data from the Ministry of Labor will be released only on Friday, but statistics from ADP will definitely interest the markets today.
India Scares, ISM Disappoints, and Munger CursesAs it's been usual in recent weeks, India has been the main destroyer of sentiment in the financial markets. The pandemic is raging there. And although the central authorities of the country stubbornly refuse to announce a nationwide lockdown, individual states and the capital of the country are forced to declare it.
As a result, it becomes more and more obvious that India will not see double-digit GDP growth in 2021. The surge in the pandemic in the country has already minus about 7M jobs and triggered an increase in unemployment to 8% in April from 6.5% in March.
And then the ISM data came on business activity in the US manufacturing sector. Most of the elements, as well as the index as a whole, turned out to be below the analysts' forecasts.
One cannot help but recall the old rule of investors: “sell in May and leave the market”. If we analyze the statistics of the behavior of stock markets, including the United States, over the past few decades, it turns out that the worst time of the year for the market is the period from May to October, and the best is the period from October to May (the so-called Halloween Effect). So, statistically, now is the time to fix profits in longs and go into cash or even sell on the US stock market.
Meanwhile, the cryptocurrency market is undergoing tectonic shifts. Bitcoin, which at the start of the year with a share of 70% was essentially cryptocurrency markets, is rapidly losing its status as a crypto monopoly. The share dropped to 46%. Largely due to the rapid growth of ether, as well as Doge and Binance coins.
Charlie Munger from Berkshire Hathaway will remind you of what professionals think about the cryptocurrency market. During the Q&A session at the Berkshire meeting, he branded cryptocurrencies as best he could, calling them a disgusting development, useful only to kidnappers and ransomware. The position, of course, is quite an ultimatum, but it has a very tangible, reasonable grain.
Week in a Glance: India, Fed, US GDP and Biden's Plans As for the pandemic, the past week was marked by the catastrophe in India, which became the sole and undisputed world leader in the pandemic. In general, we noted a year ago that India, being the country with the highest population density and even in theory unable to organize social distancing, is a powder keg. Yes, it didn't explode last spring, but it does that now. It is very likely that a new type of virus with a double mutation is to blame.
India ended the week with 400K + new infections per day and an increase in the global proportion of cases, which is starting to approach 50% of the global number of cases. We don't think it's worth talking about the collapse of the country's medical system. The capacity of the crematoria is not enough, so they returned to the good old burning at the stake, the result of which was a shortage of firewood. In general, it’s an absolute horror.
Considering that it was India that was the driver of the global economy growth in recent years, it was somewhat strange against this background to see records of commodity markets: copper prices reached their highest level in 10 years, and prices for soybeans, wheat and corn reached their highest levels in eight years.
However, the world is stratified every day more and more. Where vaccination campaigns have been adequately organized, countries are showing rapid economic recovery, which is driving up commodity prices.
Last week, the US reported first-quarter GDP growth, the highest since 2003 (excluding the statistical outlier in the third quarter of 2020).
Optimism was also fueled by a super-successful reporting season, as well as Biden's next plans: this time the US President announced a large-scale "American Families Plan" worth $1.8 trillion. Well, the Fed has traditionally been on the side of the optimists, leaving the parameters of monetary policy unchanged and assuring the markets of the current exchange rate inviolability. That is, the ultra-soft policy as well as an abundance of cheap money has been.
The coming week is interesting primarily with statistics on the US labor market, as well as the results of the Bank of England meeting and figures on China's trade balance.
US GDP and Other Data, Getting Ready for the Numbers for EuropeYesterday was rich in all sorts of macroeconomic statistics. The key data, of course, were the US GDP growth rates in the first quarter of 2021. Recall that the current consensus in the markets is the expectation of a quick recovery in the world's largest economy.
In this context, the data did not disappoint. The 6.4% growth was the second largest since the second quarter of 2003, and was only surpassed by the growth in the third quarter of 2020 (but there was an ultra-low base effect after the 31.4% drop in US GDP in the second quarter of 2020).
However, let us introduce some skepticism into the data, noting their steroid nature. This refers to the fact that consumers, who account for 68.2% of the US economy, increased spending by 10.7% for the quarter, compared with a 2.3% increase in the previous period. That is, the lion's share of the record is caused by checks for $1400, which the government handed out to the right and left and on which consumers bought goods. But this was a one-time action. So far, no one plans to distribute new checks. So, you shouldn't take the data for a very clean coin.
This idea was somewhat confirmed by the data on jobless claims. The number of applications for unemployment benefits, both primary and secondary, remained virtually unchanged over the week. That somehow does not fit well with the concept of record economic growth.
Today, the Eurozone and its key economy, Germany, are reporting on the GDP growth rates for the first quarter. Considering that the beginning of the year passed under the sign of a pandemic and lockdowns in Europe, it is hardly worth expecting a super positive.
The Fed's Pause, and Biden Presents Another PlanThe Federal Open Market Committee of the Fed yesterday left the base rate unchanged in the range from 0% to 0.25% and kept the monthly rate of bond purchases at $120 billion. At the same time, the head of the Central Bank Jerome Powell once again confirmed that in the foreseeable future, the parameters of monetary policy will remain unchanged, despite the success of the vaccination campaign and the rapid recovery of the US economy.
Financial markets have received another confirmation that the holiday of cheap money continues and you can continue to buy everything that is on sale. For the sake of fairness, we note that despite the total overvaluation of the US stock market, companies such as Apple or Alphabet, judging by the latest quarterly reports, really have a reason to buy. Yesterday, for example, Apple reported a 54% increase in revenue over the same period last year. At the same time, all (!) segments of the company demonstrated double-digit growth. Well, the cherry on top for buyers was the announcement of a $90 billion share buyback program.
US President Biden tried not to fall out of the general festive context. In his first address to Congress, he unveiled a massive $1.8 trillion American Families Plan. In fact, we are talking about the practical implementation of the basic values of the democrats - to redistribute financial resources from the rich to the poor. Biden's plan aims to help low-income Americans by raising taxes on wealthy Americans.
On the issue of inequality, but on a global scale. New York will lift curfews for bars and restaurants on May 17, and Delhi's mayor is trying to stabilize supplies of wood that is starting to be scarce as cremations continue to rise.
Earnings Season's Peak, Fed's Decision and Tesla's DeclineThe earnings season is reaching its climax today. And so far, this is one of the best seasons in US history. Four out of five companies that have already reported have published the best financial results, or at least in terms of forecasts. Tellingly, the markets have largely ignored this: according to data compiled by Bloomberg, on average, the shares of S&P 500 companies after the published reports rose by less than 0.1%. The reason is that the markets were hoping for even better results.
Let’s consider Tesla for example. The best ever financial results: maximum income, maximum profit. But stocks rained down yesterday. That is, for us, this is not surprising, because we consider the shares to be incorrectly valued at times and a decrease in their price is a natural thing. But we still can't believe that the markets have finally begun to read the financial statements, have learned to add numbers (with a profit of 483 million, revenues from sales of regulatory loans amounted to 518 million, add to this 100+ million additional income from the sale of Bitcoins and get a good hundreds of millions of losses) or compare the facts (Toyota needs a week to produce the same number of cars that Tesla produces in a quarter, but Tesla's capitalization is 3 times more).
Today the Fed will announce the results of a two-day meeting of the Committee on Open Market Operations. It is definitely not worth waiting for surprises. Powell, like a mantra, has been repeating for several months in a row the idea that the rate will not be raised in the foreseeable future, and the Central Bank is not planning to change the parameters of monetary policy. And in general, if they even begin to think in the direction of tightening monetary policy, the Fed will warn in advance.
Nevertheless, this event is of exceptional importance, which means that the markets will look forward to it. Moreover, a bigger half of the experts believe that already in the fourth quarter of this year the size of the quantitative easing program will be reduced.
India's Economy Starts to Slip, but Commodity Markets BoomingThe start of the week was marked by India. In the sense that pandemic records in the country and a complete loss of control over the situation are increasingly materializing in the Indian economy. A number of indirect metrics (the volume of goods transported by rail, the number of residents leaving their homes, etc.), as well as direct ones (the unemployment rate), indicate that economic activity in India is beginning to experience serious problems.
Considering that India has been one of the main drivers of growth in the world economy in recent years, it is somewhat strange to see a record rise in prices in the commodity markets against the background of such news. Copper prices reached their highest level in 10 years. Soybean, wheat and corn prices all hit their highest levels in eight years. And the Bloomberg Commodity Index has reached its highest level in the past few years.
However, the oil market was far from being so optimistic. A sharp slowdown in the economy of the world's third oil importer is a serious cause for concern. Coupled with the increase in production from OPEC Plus, starting from May, the level of anxiety should only increase. In this light, our recommendation to sell oil at current prices remains relevant.
As for the situation on the US stock market, this week the official presentation of Biden's tax plans in all their glory is expected, which will be quite expensive for taxpayers. We have already noted that this is a very serious bearish signal for the stock market. For example, last week on the news of plans to double the tax on capital, the largest exchange-traded fund of shares of technology companies QQQ lost about $ 6 billion. On the other hand, these giants are reporting this week. If they do not repeat the Netflix failure (which is unlikely), the US stock market may well renew all-time highs.
Week in a Glance: Biden & Taxes, ECB, Bank of Canada, CryptoThe past week was one of the worst for the cryptocurrency market in recent years. The following reasons were mentioned: a sharp drop due to power outages in some regions of China, rumors about possible fines from the US Treasury of financial institutions for money laundering using cryptocurrencies, the cryptocurrency use ban in Turkey, as well as information about the flight of the head of Thodex, the Turkish cryptocurrency exchange, who was said to have fled with $2 billion in customer funds. Well, the week ended with the information that the Head of the Financial Regulation Agency of South Korea said that all cryptocurrency exchanges in the country could be closed in September.
The rest of the week was comparatively not rich in significant and fundamental events. India continued to churn out anti-records and drag the whole world down (already more than a third of global cases of diseases occur in India), which showed an increase in the number of cases for the 9th (!) week in a row.
The ECB and the Bank of Canada expectedly left the monetary policy parameters unchanged.
Biden, however, unpleasantly surprised buyers in the US stock market. Capital tax is planned to be drastically increased (almost doubled). The current rate is 20%, and Biden proposes to raise it to 39.6%. Taking into account the additional tax of 3.8%, in total, according to the results of the reform, investors may find themselves with a burden of 43.4%. The Republicans added negativity with their version of the infrastructure plan, which is almost 4 times less than the one proposed by Biden.
The coming week will be interesting primarily because of the FOMC Fed meeting, as well as preliminary GDP data for the first quarter in the US and the Eurozone. Earnings season peaks this week. Almost all titans will report - Apple, Microsoft, Amazon, Google, Facebook and Tesla. Speaking of Tesla, recently, the news background has been very negative: either the Chinese are accused of low product quality and are harassing in the media, or a fatal car accident, with nobody is driving Tesla, and the fall of Bitcoin, taking into account the 1.5 billion invested in it, also does not contribute to growth of optimism