Thirty years after the fall of the Berlin wall, the world is more divided than ever. Conflicts became more ubiquitous between and within countries, between nations and amongst them. A new Cold War is shaping under the horizon and it will be more complex and less ideological than the previous one. What will be the impact of such a geopolitical conflict upon the financial markets?
If the previous Cold war looked like a chess game, the new Cold War would be more like a poker game. In such circumstances, the winner might not be the player with the best cards, but the one who bluffs more. The US has already threatened the EU with additional tariffs on products, and this could profoundly impact that German industry, the European economic engine. Moreover, the Trump administration decided to bring home its troops from Germany, thereby rolling out the red carpet for President Putin on the road to Berlin. America has also moved decisively from engagement to containment of Chinese technological, economic and military power. Concerted Chinese and Russian attempts to ‘de-dollarise’ could undermine the greenback’s value and increase US yields. This is likely to foster a world of materially higher geopolitical risk, complexity, volatility and, ultimately, inflation.
This situation is, without any doubt, dangerous and represents the most significant paradigm shift in the American doctrine after the second World War. The Truman doctrine established in 1946 aimed to support free people around the world through economic and financial aid which was essential to economic stability and orderly political processes. The US became the symbol and the guarantor of freedom and human rights. It was this role that accelerated the fall of the Soviet Union and unleashed the people's eager to embrace democracy.
The new Cold War may impact financial markets through different angles. First, we could witness a decoupling of the various financial markets from the leading financial hubs. Second, a massive market dislocation could force big actors to focus on their domestic markets, thereby diminishing the number of global players. Last but not least, the markets could disconnect from the dynamic of the real economy.
After 30 years in which financial markets were given a free rein, investors will increasingly have to adapt to a world where geopolitics are the croupier who reshuffles the cards. Yet, this is a Cold War unlike the last, with perpetual battlefields in business, trade, markets, technology, cybersecurity and outer space. Investors are on the front line of them all.
Peace is not the absence of conflict but the ability to cope with conflict by peaceful means.
President Ronald Reagan, 1982
Mean reverting market prices are a thing of the past. It is what most scholars would say. Such models were used in the 1990s to describe the dynamics of commodities prices oscillating around a long-term equilibrium value.
Currently, the stock market imitates mean-reverting behaviour. For instance, the Dow Jones bounced up and down around the psychological level of 25,500. Does it mean that this is a market equilibrium value? For sure, it is not. The stock market is waiting for additional information about the post-pandemic economy, the political unrest, and the global trade conflict. Thus, the current equilibrium is unstable, and it might quickly unfold into a regime of higher volatility.s over?
It is not a secret that the banking sector is struggling to redefine its identity in the post-pandemic world. The shares of the leading American banks underperformed the S&P500 since the beginning of the year. Goldman Sachs is the best in the class exhibiting losses of only 13%. Bank of America, the leading US retail bank, lost almost 30% of its capitalisation since January. Banks with significant retail and commercial operations will suffer the most. The investment banking tycoons will keep their places at the table of champions.
For years ago, on 23rd of June 2016, Brits decided through a referendum that being in the EU was not what they wanted. Since then the FTSE 100 underperformed its peers significantly. While the Dow gained over 40%, the FTSE remained at the same level. Even the European indices, the CAC 40 and the DAX gained 19% and 26% respectively. The British pound lost ground to the Euro, going close to parity in a few occasions. The trade deal with the EU does not seem to reach any conclusion. So, what is the future for Her Majesty's subjects? Despite, the fact most analysts believe that the UK may go through a tough time, we should not forget that the Brits still hold few winning cards. With the social unrest in the US and the grip of the EU economy, the UK could quickly become the "Rome" of finance, innovation and entrepreneurship. All bets are still on!
Many are those believing that the cannabis industry would represent for the COVID economic crisis, what bootlegging was during the Great Depression era. The cannabis companies operate in Canada and in the American states where the recreational drug is legal. Tilray, one of the largest producers of premium medical cannabis underperformed the Dow Jones since the beginning of the pandemic. Moreover, some of its peers, including Abbvie gained momentum during this period. Abbvie's share performed well also because the firm produces Kaletra one of the drug used in the COVID treatment.
As predicted, the Gold ounce remained into positive territory. NASDAQ flirted for the third week with the 10,000 USD level but dipped to 9,750 on Friday. The sudden increase in the number of COVD cases in the US and Facebook's dip due to a foreseeable contraction in ads revenue were the major negative market drivers. The Brent crude and Bitcoin should move north over next week. We expect a significant correction on the Dow Jones before September.
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.