God save the Greenback!

Afghanistan exit, quantitative easing, hyper-inflation, shortage in supplies, China’s voracity… The list of factors threatening the leading position of the US Dollar is much longer. The Biden administration seems increasingly aware of the unforeseen dangers caused by losing the supremacy in international trade.  Is it too late to save the US Dollar?

Biden reconfirmed Jerome Powell, a reputed Republican as chairman of the Federal Reserve. It delivered a strong signal that the future legacy of the US currency is a major concern. Powell and a few other of his colleagues undermine that the tapering of bonds repurchase needs to start even earlier. These announcements come amid a new coronavirus variant that could be more damaging than the previous ones.

Long-term hyperinflation is not an option for the United States. Strong dollar devaluation, juxtaposed with strong growth of the Chinese economy, would fragilise Washington’s position on the international arena. While such a scenario is on the table, the White House may need to pull all strings to avoid it.

Avoiding hyperinflation and slowing quantitative easing, means  that stock markets will begin a descent. The science behind tapering is not the amount of asset buybacks but their timing. What Powell tries to avoid is a sudden drop in asset prices which could gerentate havoc in the credit and fixed income markets. Reproducing the 2008 scenario would be a recipe for disaster.

With hindsight, Powell needs to fix not only the COVID - related issues, but all the unnecessary quantitative easing pushed into markets since 2009.

When the dollar collapses, it's not doing it in a vacuum. If the dollar loses value, it's doing so relative to some other currency. So the purchasing power that we lose, somebody else gets. Peter Schiff, American stockbroker, financial commentator, and radio personality

Market overview

The US unemployment rate declined to a 21-month low nearing 4.2%. Nevertheless, US jobs creation growth was much slower in November. These figures are undermining the enormous depletions of the employment market. Employers are facing dislocation in their supply chain processes.  The declining unemployment rate points out that some workers left the marketplace for good and will not be back, except force majeure.  

Bitcoin went through a massive sell-off triggered by institutional investors that look towards safe harbours and traditional currencies. Bitcoin plummeted USD 10,000 in less than one hour. This sudden move shows that we are closer than we believe to a massive market sellout.

Focus:

Meta

After hitting a one year high in early September Meta share price moved slowly into negative territory. While Meta's financials look not bad at all, investors are seeing more risk than reward in the company that owns Facebook. Negative media and increasing pressure from governmental agencies are inflicting supplemental bearish pressure upon Meta’s price.

There is no secret that the US government will dig further into Meta’s businesses and try to bring additional prudential burdens. In Meta’s case, the trend is your friend.

Focus:

Alibaba

The love story between China and the United States is getting closer by day to a fatal end. US regulators are not happy with the lack of transparency of Chinese companies listed on US exchanges. Alibaba and Baidu are the main stocks available to US investors for over a decade. US authorities took significant steps towards delisting Chinese companies from NYSE and NASDAQ.

The SEC, American watchdog, is looking to pass a new regulation forcing Chinese companies to open their books to US auditors. Investors have already started a sell-off of Chinese stocks. For instance, Alibaba’s share is following a negative drift since early November. The policy aiming to delist Chineses stocks was initiated by the Trump administration and is continued under the Biden regime.

Cryptocurrencies:

Ethereum

White Bitcoin, world's leading cryptocurrency started a bearish pattern, Ethereum, the other top coin, had a more stable evolution over the recent weeks.  Moreover, Ethereum is doing just well compared to Bitcoin, ETH/BTC  price hitting a new all-time high suggesting that there will be more upside. Bitcoin is a victim of its own success as it became mainstream. Therefore, Bitcoin has a bigger systemic component in its behaviour.

The sudden focus on Ethereum is stemming from its utility for  smart contract platforms. Non-Fungible Token (NFT) developers are inclined towards ETH as the main coin for backing virtual art.

Focus:

VIX

Omicron spreads and Vega rises. The CBOE Volatility Index reached its highest level since February when the Delta variant was erupting. The return of a turbulent regime is not transitory and market returns should exhibit more fat tails over the next quarter. Institutional traders will experience a higher cost of hedging and have a supplemental incentive to sell-off.

These are good times to trade options and going long volatility.

Market outlook

The Dow Jones Index lost ground over the past week ending below 34,600. The new Omicron variant and anticipated tapering of bond repurchases signal the beginning of the market decline.

Bitcoin ended the week below USD 46,000, losing more than USD 10,000 in less than one hour. While the market correction will continue,  technical purchases could bring the  leading cryptocurrency above 50,000 USD in the short run.

Oil prices boomed in the initial phase of the energy crisis. Nevertheless, COVID resurgence led to a two-state energy market, with oil prices moving into negative territory. If more countries opt for lockdown, we could see a downward trend in oil prices.

The Gold ounce ended the week on a positive note closing near USD 1,785. The foreseeable market contraction and the inflationary context are good arguments for believing that gold prices could soar in the near future.