Markets versus Reality

The pandemic progresses rapidly in South America and India, while several European countries are preparing for a second wave. Social turmoil started in the US expanded in other countries leading to riots and protests. The perspective of a V-shaped economic recovery becomes a distant dream, and a prolonged downturn seems to be closer to reality.

1.5 million Americans filed new jobless claims last week, thereby making the employment figures worse than expected despite reopening. But, the stock market remained insensitive and continued to show lesser reactivity to fundamentals. Nevertheless, the S&P 500 lost only 3.3% since the beginning of the year, while NASDAQ gained 11%, reaching its historical maxima.

Are the financial markets under anaesthetics? Are they disconnected from reality? What is the actual fundamental value of listed companies?

The layperson investor following the teachings of classical financial theory would be tempted to say that markets are overvalued, as they do not reflect the economic reality. But, things changed since Fama's time. Financial markets and the real economy have a more balanced and bilateral relationship. Indeed, stock markets should reflect as accurately as possible the "true "value of companies. In the same time, the state of a company's business reflects what investors believe about it. Markets are not only a simple reflection of the reality seen through investors' eyes. They are also one of its drivers.

Overvalued stocks inflate assets' fair value. Thus, leveraged companies are less likely to get in the near-bankruptcy zone. Amid a sudden economic slowdown, a strong price signal on the financial markets aims to avoid a "credit crunch", similar to what happened in 2008.

Money values do not simply mirror the state of affairs in the real world; valuation is a positive act that makes an impact on the course of events. Monetary and real phenomena are connected in a reflexive fashion; that is, they influence each other mutually. The reflexive relationship manifests itself most clearly in the use and abuse of credit.
George Soros, Hungarian-American billionaire investor and philanthropist

Market overview

There are counterintuitive behaviours on the stock market.  When analysing some emerging markets, things are drifting in murkier waters. The leading Chinese indices, including the Shanghai and Hong Kong indices, show even better colours than the Dow Jones. The most disturbing outcome is observed on the Hong Kongese shares, which remained into positive territory despite the restrictions inflicted by the US administration. Seemingly, the competition between markets does not concern any more prices, but governments' egos. The leading nations are going through a pattern where they went from supporting the markets through liquidity injection to showing off to each other who pumps more. The current monetary policy is nothing else than a steroid therapy for the stock market. Will the gains remain when the steroid cycle is over?

Focus:

Volatility rebounds

When volatility is high, the markets are low. It is a common belief amongst investors, which currently seems not to be entirely valid.
After a period of silence, the volatility index rebounded over the last week. The stock market remained stable amid a less optimistic reopening. It is the only indicator underlining the instability of the current situation. It could also signal the accumulation of factors for a new market dip towards the end of June. High volatility regimes are the results of an instable supply/demand equilibrium, thereby triggering structural disruption in the market. The stock market is walking on thin ice, and it could break at any moment.

Crypto:

Bitcoin in agony

Bitcoin's price got stuck in a stable yet jeopardising zone, just below the 10,000 USD resistance level. After the May-halving the mining difficulty dropped significantly, and so did the mining cost. Currently, mining Bitcoin costs between 8,000 and 9,000 USD, thereby making it mathematically profitable. But, most miners are struggling with current prices, and despite the three months rally, the market is still hesitant. The price signal should be more robust to get additional liquidity inflow.

Most central banks went into a printing money carousel amid the coronavirus crisis. Therefore, more investors are looking into Bitcoin and are projecting scenarios like those from 2017. The real threat is that a market dip could hinder the Bitcoin system as it could make mining non-profitable. Bitcoin needs to find a second wind quickly to remain sustainable as an alternative currency.

Commodities:

Oil is boiling

Oil traders seem to be confident about a sustainable rebound in demand over the following months. The Brent crude found support at 40 USD and exhibits a positive outlook. This occurs only two months after the crude futures traded at negative prices, a premiere in the history of financial markets.

The leading oil companies are fighting for surviving, many facing bankruptcies. Scarcer future supply could be one of the reasons why the market is optimistic, amid signs of a second wave of COVID infections. Nevertheless, a second lockdown could be lethal for the demand and the oil industry.

Market outlook

As predicted, the Brent crude oil and Gold remained into positive territory. NASDAQ flirted again with the 10,000 USD but bounced back towards 9,900. The Dow Jones may observe further corrections as the economy opening is slower than predicted. The Brent crude and Bitcoin should move north over next week.