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Fighting inequalities through financial markets

By Marius-Cristian Frunza
Weekly Briefs

The civil unrest triggered by the murder of George Floyd on 25th of May unveiled new facades of inequality in the US as well as in other developed countries. The politicians from various camps hastened to propose new policies and more robust regulations, hoping to calm down the turmoil.

But, can policymakers and politicians reduce inequality?  

Inequality is nothing else than a negative externality for society.  The bigger the inequalities are, the higher becomes the cost of dealing with their byproducts.  Structural unemployment, crime spree or higher cost of medical care are only a few examples of negative externalities, generated by social inequalities. Throughout recent history, economists identified two different solutions to deal with overspill effects. The tax-based solution is the most popular with governments and lawmakers. The Pigouvian tax (named after the English economist Pigou) considers enrichment as the primary source of inequality. It aims to redistribute the monies of the wealthiest to the lower social strata. High taxes and copious welfare programs were in the centre of the political debate over the past 50 years.

The other solution introduced by the American economist Coase aims to reduce the negative externalities through financial market-based mechanisms. Indeed, high taxation reduces only apparently the inequalities but in the long term, differences between the social strata become bigger. Governmental programs rarely do a good job when they need to allocate budgets and fund social projects. Markets, on the other hand, are more objective and price better the information. Financial markets could be the right solution that can unleash the potential of reducing social inequalities.

The current rally of tech companies on the stock exchange amid the pandemic is a sign that the world is accelerating its move towards digitalisation. It represents the perfect opportunity for technology firms to gather their forces and invest in preparing the communities touched by unemployment for the new technological revolution. Financial markets could finance such initiatives and provide a price signal about their effectiveness.

As long as poverty, injustice and gross inequality persist in our world, none of us can truly rest.
Nelson Mandela, South-African President

Market overview

The equity market suffered a significant correction on Thursday when the Dow Jones lost almost 7%. The rally started last week when the Dow tested the 27000-resistance level exploded amid fears of a new wave of infections with the new coronavirus. The drop in the number of infections in the US is stalling, and the recent increase in the number of cases deflated the optimism for a V-shaped recovery.
The impact on Nasdaq was smaller, but the index retreated after reaching its historical peak over the 10,000 boundary.

FX:

The end of the US dollar?

In our weekly research published on the 3rd of February, we foresaw that: If the Coronavirus outbreak represents only a fraction of the 1918 Spanish influenza pandemic, the consequences upon the US economy and US currency would be very disruptive. Four months later, the pandemic outbreak hampered the US economy severely and dislocated global trade. The US dollar gained momentum during the early days of the epidemic, being perceived by investors as a safe harbour. Over the last four weeks, the dollar starts to lose ground at an increasing speed, conceding almost 17% to the Euro.  

Is this the consequence of the pandemic conflated with the social turmoil ravaging the US? For sure, it is not. The dollar is the master but also the slave of its hegemonic role as the world’s primary reserve currency.

The amount of worldwide transactions negotiated in US dollars represents almost 70% of the total, and this guarantees the strategic leading position to the American currency. The “Trade Wars” initiated by the current administration along with the extraterritoriality of the US laws implemented by the Obama administration deter the global traders from using the dollar, thereby weakening slowly but surely its position.

Moreover, to deal with the financial burden of the lockdown, the US Federal government searched deep into its pockets. Therefore, the federal budget deficit is to soar to a record level of 17.9% of the gross domestic product in 2020.

If we consider the rising level of the US debt, all ingredients for a bearish recipe are reunited. The decline of the US dollar is preached regularly since Nixon’s era, but now the threat is not from outside as much it is from within.

Focus:

Zoom Communication Media

WFH (work from home) is an abbreviation that represented for many over the past decade a dream that became a reality during the pandemic. High rents in big metropoles, long commuting times and precarious work-life balance seem to be already forgotten.

Remote work opened the gate to a whole new industry that should provide to corporates the tools to organize, monitor and control the work of remote employees. Zoom is the pioneer of this sector, emerging as the primary tool of online corporate communication during the pandemic. Zoom’s share almost doubled in value since the outbreak of the coronavirus.

Communication is not the only challenge of remote work. Management and performance monitoring are also crucial factors. Therefore, the Agile methodology for managing and organizing teams could gain significant momentum.  The share of Atlassian, one of the leading companies that proposes a solution for Agile increased more than 28% since February.

Market outlook

As predicted, the Dow Jones retreated below 26,000, due to technical sales and on fears that the recovery hopes were too optimistically incorporated in the market price. The foreseeable situation on the equity market will become more complex as we are getting closer to the US elections. The likelihood of Trump’s re-election is at a historical low since he entered the White House. The Wall Street banks are accelerating the donations towards the Democratic candidate, his chances soaring amid social turmoil. The political crisis could lead to increased volatility during Q3, thereby hindering the market recovery. The US dollar should continue its slow retreat until the end of the year.

Bitcoin tried without luck to get through the 10,000 USD resistance level but bounced back below 9,500. Our market view is bullish in the long-term on Brent, Gold and the Bitcoin.

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 in- strument 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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