The Bigger Short. Is the market selling off?

The summer was crazy, and its relentless euphoria seems to come to an end. Investors are starting to sell, and markets send the first bearish signals. Many believed that quantitative easing would go forever, and buying stocks online can replace good old jobs.

What could the retail investors expect in such circumstances?

Quantitative easing was, without any doubt, a positive thing. It provided stability to big corporates and allowed them to avoid catastrophic situations. As a result, the US economy had a significant rebound during the summer with a job creation above the expectations.  The leading stock indexes are at the same level they were before the pandemic. Still, the economic recovery is not precisely V-shaped, and some structural damages may be irreparable. Governmental agencies did what they need to do, to avoid a 2008 scenario at a bigger scale. But, there will be a moment when the market would need to reflect the real situation. It is only a matter of timing, and one should take into account that significant political changes are at stake, including the US election, Brexit and China’s role in the global architecture.

It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.
Mark Twain

Market overview

The market contraction which began in early September accentuated this week and affected mostly the markets that accumulated consistent gains over the past six months. NASDAQ lost 10%, thereby erasing all August gains. Technology stocks attracted a significant chunk of the retail liquidity that is pouring in the financial markets since the pandemic outbreak. Consequently, when individual investors felt that the wind is changing, they initiated a big sell-off in order to monetize their profits.

Most markets retreated over the last days, including Bitcoin. After the summer rally, we are entering a consolidation period, when investors follow the “bird-in-hand” theory and would like to get their monies, regardless of the underlying market. Even the volatility index (VIX)  had a negative slope over the past week. Such co-movements of the price signals across different markets appear when traders are rushing to make decision fuelled by panic.

Forex:

Hard and Heavy Brexit

London is very eager to cut all ties with Brussels hegemony and to leave the EU, whatever it takes. While things seem simple on paper, the laws governing such treaties are overwhelmingly complex. The Brits not only want to get out with no deal, but they want to repeal the withdrawal agreement unilaterally. Needless to say, that this is in contravention with international law.

The UK is not facing only a no-deal Brexit, but also could fall into a legal hiatus, which could bring only additional issues to the matter. This political crisis had already a significant impact on the British pound. Since early September, the GBP/EUR plunged from a steady 1.125 into negative territory below 1.08. Bank of England has limited options in such circumstances, and the party scenario starts to become plausible. The British pound will pay the reputational cost due to the erratic actions of Downing Street’s tenant. But, this could be just a short-run effect, and the GBP could come back in October when the Q3 macro-economic figures could support the argument of Britain’s sharp recovery.

Focus:

Gold Stocks

When a new bubble is growing around technology stocks, a class of more traditional companies looks for a place under the sun. Gold mining companies are benefiting from the rally of gold prices.  Extracting the yellow metal is a very lucrative business, especially for the Canadian companies that are pushing hard for the last ounces before the arrival of the winter that makes the paydirt unexploitable.

Consequently, the listed gold mining companies went through a strong rally since marsh with lower volatility. The VanEck Vectors Gold Miners ETF is the largest ET providing exposure to a diversified portfolio of companies involved in the gold mining industry. During the last two weeks characterized by high volatility and negative returns, the ETF remained relatively stable.

The prophet from Berkshire said that the best investments are in profit-generating assets. Gold stocks are such an example, and the outlook is positive.

Commodities:

Crude in crisis

Oil prices entered negative territory since the beginning of the week. The price of the Brent crude dipped below 40 USD amid signals of a second wave of the pandemic. The optimism from early June when things were supposed to go back on track by September disappeared, and it is clear that the pandemic will stay for the remaining of the year. This affects the demand for oil and refined oil product massively, thereby putting pressure on market prices.
Oil prices should continue to move south until new elements could indicate a surge in demand but not before November.

Market outlook

As predicted, the Dow Jones dipped significantly and found support at 27,500. There are not enough reasons to support a positive outlook. Further correction should be no surprise in the stock market. A more significant dip could occur before the US elections on the 4th of November and the size, and the timing of the rebound will depend on the voting’s outcome.

The Gold ounce followed a trajectory that we indicated last week and managed to hang around the 1,950 level. Gold prices seem more resilient to a big sell-off. Many investors that see gold as a safe harbour could do a switch from stock to gold.

Bitcoin’s case is more complex, and it lost value amid the global sell. The tendency could continue over the next week, and we may see Bitcoin below 10,000 USD. Nevertheless, in the long-term, its perspectives are more optimistic.