• The London Financial

Weekly Markets Round-up: 27 - 31 July 2020

This week in markets – Tech against the World

The recent rally in the US markets has been totally driven by the top five biggest stocks. The below chart from Bloomberg demonstrates this beyond a doubt. This shows that the discrepancy between the top five largest companies and the rest has got increasingly worse in the past five years.

The new world tech stocks have dominated the US markets this year, almost making a mockery of several of their CEOs who claimed in a congressional hearing this week that their companies were not too big.

US markets have been accused of rallying without caring about the ongoing healthcare crisis. However, the above chart and other data paint a different picture. Without these five stocks, the market would be down significantly.

This concentration exposes investors to huge downside risk. For example, markets are still completely ignoring the US election later in the year. If Joe Biden wins as polls are suggesting, his choice of Vice-President could have a huge impact on the future of these five stocks. I would be wary of this risk as Biden announces his VP next week.

Three of these companies also reported sensational earnings on Thursday, despite the US GDP falling 33% this quarter. Apple as a result set a new price record, Amazon’s profit doubled and Facebook easily beat estimates.

If I were Bezos, Zuckerberg or Cook, I would be a little on edge. During the congressional hearing, which also included Sundar Pichai, they all argued that their companies were not too big. The below data from the NY Times shows the prevalence of this defence.

Source: New York Times

This is an almost laughable claim. Their companies have achieved massive profits when the economy, the majority of companies, and most families have suffered. The fact is that they are too big — it is undeniable. To be clear, I am not advocating for these companies to be broken up. That process is complicated and, in my opinion, it is not a real solution.

The point of this is to ensure that investors are aware of the risk now present in the market. The S&P 500 is now moved by five stocks, which is a recipe for disaster. While this rally may continue for a while, any shock to one of these brands could have a huge effect on the index. A shock to all five could have disastrous consequences.

Beyond the US, the week was very bearish, as investors absorbed worsening data from major economies.

Source: MarketWatch

Negative data was announced from various sources across the world, forcing markets to face reality. This will not be a V-shaped recovery — the road will be long and arduous. Thankfully, history tells us that we will return to the pre-COVID boom, as economies have in all previous recessions and depressions.

It is hard to predict where the markets will go next. However, this week marked a shift in focus away from the virus to economic signals and earnings reports. This may reverse again in the next few weeks, but only time will tell. For now, investors must stay vigilant.

By Charles Heighton - VP of Trading at King’s Global Markets

Dollars and Fly Fishing

Ideally buying into a reserve currency would be like fly fishing, you cast your line with a flick of the wrist and watch the water ebb and flow. Every now and then, there will be something to write home about, ideally a fish, but for the most part, there should be absolute calm and maximum inactivity. This has not been so for the Dollar even looking beyond the last month being the worst in a decade.

The consensus in foreign policy circles seems to be, this century, belonged to China. Watching the near-miraculous Chinese story and the success of the Belt and Road initiative, apparatchiks are thoroughly convinced that the 21st century will not be an Eastern one. Whether China will sacrifice its Balance of Payments surplus to make the Renminbi a global reserve currency seems unlikely. Decades of implementing policy to ensure a weak Yuan tells in the price charts. A Yuan, at its strongest in the last year, was $0.1513, now at $0.148 — it is close to the year low of $0.145. Bereft of volatility but also value. It is hard to see how such a currency could attract investors in times of panic. Where else could investors go?

The Euro manages to hold up a lot better than the Dollar, so it may be the best bet for the period of transition we will see in the next decade if you set much stock in foreign policy experts. The last recession revealed Brussels will do anything to keep the currency alive, and the next recession will bolster this resolve. Doing anything else will mean trillions of Euro have been wasted with Quantitative Easing. This test will be issued in the next year or two. Post-COVID, businesses, and households will have to evaluate how the pandemic has added to what were already high debt levels.

As things return to some semblance of normal, businesses will have to contend with changes in how all consumers spend being part of the new normal. Those that fail will go bankrupt. Similarly, consumers may start defaulting at all-time highs as COVID-issued debt pushes them over the cliff. A failure to create resilient capital markets in Europe will be punished to a severe degree. Some argue the Dollar will continue to be a store of value in the coming years. They are often poor arguments that fail to account for the institutional damage Trump has wrought.

Poised to delay the election, the Dollar will plummet as soon as Trump announces the news. As Democracy is being steadily eroded, a fundamental part of it — Capitalism — is too and every attack on American Democracy is an attack on it. This will reverberate through to the Dollar. Additionally, proponents of Dollar supremacy ignore the effect Artificial Intelligence will have on the Balance of Payments. As AI becomes a fundamental component of most manufacturing components, costs will be slashed as employees are phased out in developing countries. It makes no sense to place such a manufacturing plant in a location with inadequate infrastructure, so many American companies will bring their manufacturing home. Only raw materials will be imported to produce what used to be Made in China products.

Without a deficit on the Balance of Payments, it gets more difficult to get other countries to buy into the Dollar. Now no longer dependent on the US for income, it is plausible that many countries will see a weakened Dollar and increasing pivot to gold. Some countries may even keep a bare minimum of currency, and see gold and silver as the only products capable of holding up in the coming decades. Other countries will buy into China as its Belt and Road initiative wraps its tendrils around them. Barely any will denominate their reserves in Euro beyond the Eurozone, as the Union has failed to grasp the importance of getting non-Eurozone and even non-European countries of buying in and keeping it alive.

In short, the next decade will be rough for currencies. Gold will become increasingly attractive as the bull run will continue or, if not, be followed by a series of smaller bull runs. Silver will follow this route, lagging slightly behind gold, as investors move in once they are priced out of gold or seeking to diversify their metals basket. Fly fishers should avoid currencies for the foreseeable future.

By Robert Tolan - University of Dublin, Trinity College

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