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The Big Reset

By Marius-Cristian Frunza
Weekly Briefs

The coronavirus outbreak not only smashed the traditional lifestyle of the Western countries but damaged the developed economies seriously. The leading market indices are near all-time high levels, and an unadvised investor could believe that the real economy is thriving. The big picture has many counterintuitive and contradictory elements. Therefore, we could think that there is a bigger picture, which could provide a glitter of sense to nonsensical market figures. If such a context does exist, what could mean for the average investor?

The levels of governments' debt are skyrocketing, and seemingly the engine of the modern economy is gripped. If global leaders manage to restart the engines, the outcome will be meaningless under the current circumstances. How can a government incentivize people to work for the minimum wage whilst staying home and buying stocks is more lucrative? At this point, the theory of the big reset comes into the equation. For the economy to restart efficiently, all bets should be off, and all previous inequality should be erased. Thus, people would have a new incentive to start all over and add value to the real economy. The big reset could take various forms, including a reform of the monetary policy, a restructuring of the global debt or even a reform of property right.

For average investors, such a scenario has a massive impact on the way investments and wealth is managed. Diversification is an old song, regurgitated each time a crisis is rising. But in the current conditions, diversification should go beyond simple allocation of a portfolio over different markets. Diversification should encompass other infrastructures of investments, various jurisdictions, different monetary supports and different vehicles. You might end up shorting oil on eToro and buying physical barrels to store in your backyard. The world is changing, and so is the investment game.

We must always change, renew, rejuvenate ourselves; otherwise, we harden. Johann Wolfgang von Goethe, German Poet

Market overview

Markets delivered positive signals following Biden's announced election in the White House. The leading US stock indices are flirting with historical maxima, whilst the volatility plummeted suddenly. But, one should be cautious before considering that markets have no more stories to tell. January will bring the first fillings for 2020, and many surprises could unravel the current status quo.

There are no reasons to believe that volatility will stay in a low cluster.  Therefore, betting on an increasing volatility trend over the following month deserves consideration. The debt to GDP ratios for most western countries are becoming astronomic, and most of the debt fuels the equity markets. Thus, the uncertain future of national debts could inflict more uneasiness on the market, thereby igniting the variability of trading behaviours.

Focus:

COVID-19 vaccine

A vaccine for the new coronavirus or more precisely for the several variants of the new coronavirus is the only hope for finding some normality. Pfizer announced that its vaccine which is already in phase III with the FDA has promising results.

The European Commission has already placed a massive order for the next year. Delivering the vaccine to the end-users implies complex logistic problems due to the special conditions of transportation. Thus, the Pfizer's share had a mild rally over the past days. Nevertheless, BionTech, Pfizer's companion in the vaccine venture went from rags to riches in less than one year. If the vaccine works as promised, Biontech's share has all chances to soar to higher levels.

Commodities:

Oil

The Brent crude oil soared above 43 USD per barrel amid Pfizer's announcement about its successful test of its vaccine. A vaccine against COVID is the key to reopening the economy and implicitly of increasing the turnover of the transportation industry. A vaccine could bring support for oil demand at a global level. Timing is a critical issue in this matter. The longer the oil price stays at a lower level, the lower the probability of a rebound. Even in the case of an early release of the vaccine, the US economy may not continue its reopening strategy initiated by Trump. Slow recovery of the demand in the US may seriously hinder the oil price in the foreseeable future.

Cryptocurrencies:

Bitcoin

Bitcoin’s price was bolstered last week by positive global sentiment on the financial markets. In its tumultuous history, Bitcoin had several episodes when the price exploded. Bitcoin was perceived until recently as an alternative vehicle for transferring value, bypassing the traditional banking system. Bitcoin Cash is a Bitcoin fork used for transfers in the cryptocurrencies world for its speed. In February, the ratio Bitcoin Cash to Bitcoin had a historical high, underlying the fact that the leading crypto-currencies was used mainly as an alternative funds transfer tool. This ratio is currently at a low value. It underlines that the current rally is driven by the common belief in Bitcoin as an alternative safe harbour. It comes in the context where the leading currencies are printed at high velocity.

Market outlook

As expected, the Dow Jones continued its rally and filtered with an historical maximum at 29,200. The market is still pricing the euphoria of the US election, but a consolidation process could start, pushing the stock market into a bearish trend, that will bring it closer to the fundamentals.

As predicted Bitcoin’s rally continued reaching 16,300 USD There is no doubt that Bitcoin is becoming a leading asset in the investment arena and there are serious reasons to consider Bitcoin as a safe harbour for investors. Liquidity from a broad range of investors is moving slowly and therefore, we expect to see Bitcoin rising towards 17,000 in the early days of 2021.

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 instrument 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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