Hope & Fear: Two faces of the same coin

The US Labour Department announced a record number of new jobs in June amid pandemic. Markets saluted this achievement.  But what is the cost of fighting unemployment? Unfortunately, creating jobs for some means spreading the diseases amongst others. June brought some optimism regarding employment, but also brought a more voracious second wave of COVID infections. Jobs creation and pandemic risk are two faces of the same coin. The first gives hope for recovery; the second curtails its sustainability.

What is the impact for those aiming to extract profit from markets in these tormented times?

Volatility means happiness for the major investment banks because they have the right tools to make profits. But the layperson trading with folkloric rules like "Buy high, sell low" or "The trend is your friend" may experience discomfort. Needless to say, it is better to avoid trading when one does not have an accurate perception of what is going on. The market remained in a cluster of high volatility since the beginning of the pandemic. Nevertheless, some leading indexes, including the NASDAQ, found momentum in this volatile environment. Investors should get used with high volatility and borrow some of the strategies employed by crypto-currencies traders. The "bitcoinization" of traditional markets is a game-changer for the retail investors. How should one act in these circumstances? How to assess the risk-return relationship?

The main risk in such market conditions concerns a sudden market dislocation, resulting in massive price dip. Such events are sporadic in traditional markets due to their regulating micro-structure. But, in alternative markets, such crises are reasonably often, and returns exhibit a strong negative skewness. Accounting for skewness when establishing a trading strategy should be the primary focus for a trader aiming to compete for profits in the current conditions. Even those traders seeking to exploit long-term frictions in prices should take the underlying risks seriously because the market correction mechanism may not work efficiently even over a longer horizon.

We can easily forgive a child who is afraid of the dark; the real tragedy of life is when men are afraid of the light.
Plato, Greek philosopher

Market review

The NASDAQ continued its glorious rally above the 10,000 level, while the Dow Jones found some stability. The employment numbers brought substantial support amid a strong resurgence of the pandemic in most American states. The number of COVID deaths remains stable in the US for the moment and is the only sign of hope in the current explosion of the pandemic.

Lower unemployment numbers lead to a more moderate contraction of GDP in the second quarter, and this is a robust supporting signal for the stock market. If social unrest comes to an end, the markets could deliver another firm salute and mark the end of fearfulness.

Macro:

Structural unemployment in EU

While the US delivered another surprise in June with a further unemployment contraction, across the pond in the Euro Area, things are less optimistic. The unemployment numbers are progressing and the risk to become structural due to the rigidness of the European job market. In the long-run, it raises a lot of questions about the recovery of the Euro-zone. The strength of the European currency and the performance of the European stocks could suffer. Brussels and Frankfurt are looking for new solutions and the word "European tax" makes its way on the corridors of the European Commission.

Europe:

One Union Two Speeds

Germany controlled well enough its COVID and economic crises. Its GDP plunged by only 2.2% in the first quarter compared to more than 6% in France. Meanwhile, Sweden that had no lockdown exhibits a positive GDP increase of 0.5%. German leading index DAX managed to remain at the same level as one year ago, with French CAC40 losing more than 10%. Two-speeds Europe starts to shape in the post-pandemic reality. It will accentuate the fracture between the North and the South of the continent, thereby menacing the integrity of the Union.

Big in Japan:

TESLA

This week Tesla became the biggest automotive manufacturer in terms of capitalization surpassing the Japanese leader Toyota. Tesla had a big rally since the beginning of the year which was amplified during the COVID crisis. Toyota’s share remained almost at the same level as it was last year. The profitability of a car manufacturer is assessed over an economic cycle and Tesla did not fully went through one. Moreover, the American firm lost over 0.8 billion dollars in 2019. Therefore, we might witness a storm in a glass of still water.

Focus:

Social media in quest for revenue

Facebook's share recovered after the considerable dip from last week, due to fears of massive revenue losses. Meanwhile, Twitter seems to have more problems. All social media giants but Twitter rallied since the beginning of the pandemic.  The microblogging service provider has severe issues with adjusting its content policy amid the social unrest. Investors seem to be less confident in Twitter capacity to deal with the increasing pressure of the public opinion. We see the first battle of a foreseeable tactical war between the various social media platforms which peacefully coexisted until today.

Market outlook

As predicted, the Gold ounce remained into positive territory. The NASDAQ managed to find support at 10,000 and has optimistic perspectives to continue its progress. Nevertheless, we expect correction earlier next week due to technical sales.  The Dow Jones holds fearlessly above 25,000 and we should expect its evolution in a tunnel around this level. The Brent crude has good perspective to remain above 40 USD.

How will the story unfold around the US election?

Whatever the vote may bring, the market volatility will increase and a dip on the leading stock indices should not surprise anybody. Looking forward in 2021, the election may have a different impact depending on its outcome and the post-pandemic recovery.