From Recession to Secession

By Marius-Cristian Frunza
Weekly Briefs

The world is under a wave of fear generated by the pandemic outbreak and conflated with social unrest and economic gloom. Despite going through a rough period, the West is more divided than ever. The political divide infiltrated not only the societal debate but also science, technology and business. Developed economies are facing both recession and secession. How should investors analyse this information in the current market environment?

The equity market is at the same level where it was last year when the global economy showed a bubbling growth. Most analysts believe this is a temporary situation generated by the money printing strategy of the central banks. According to the same analysts, markets should go through a massive dip in the near future. But what if markets are right? It would mean that markets do not value the current state of the economy but a future state which would be significantly different. The pandemic increased the inequalities in many aspects, including economic, technological and social. Societies of developed countries are divided into two sides.

On the one hand, we have a progressive side, involved in technology revolutions, highly educated with the sound finances, that seems to thrive even during the pandemic. On the other hand, we have a more amorphous side, depending on governmental subsidies, with low education and working in sectors hardly hit by the pandemic. The last is touched by recession while the latter may look to a secession. Markets might price the state of the progressive side in a two-speeds society and ignore the other side. The theory of a two-speed society came to light amid the Eurozone crisis but may be put in practice in the midst of the pandemic.

Figure. United States Bureau of Labor Statistics (Source: Trading economics)
If you persist in your purpose of secession, there will be war - a bloody and cruel war. Not only will the North fight, but she will also triumph. The experiment of secession will fail, and the South, in ruin and desolation, will bitterly repent the day when she attempted to overthrow a wise and beneficent government. Ambrose Burnside, American politician

Market overview

After going through a significant contraction during September, S&P500 found support at 3,225 and switched direction North over the past week. The volatility level is still low, and VIX remained relatively stable, despite the heterogeneous information that impacts the markets. Nasdaq recovered and bounced back above 11,000.

Looking forward to November, we should expect an increase in volatility. Gold prices exhibited a small rally and recovered the losses from the previous week, reaching the 1,900 USD level again.

Moreover, the first macroeconomic data for the third semester will confirm whether the recovery was strong enough or not. Therefore, the coming weeks should solve part of the puzzle information impacting the market.

Focus:

European banks

FinCEN files published by ICIJ showed the naked truth about how the leading financial institutions are bending the rules when dealing with suspicious individuals. Markets believe beyond a shadow of a doubt that banks are guilty of helping criminals, oligarchs and dictators. Therefore, the likelihood of seeing a new wave of penalties inflicted to banks for insufficiencies in combating financial crime is exceptionally high. Thus, many banks are in a distressed situation, and their shares’ prices are at a historic low. European banks seem to be in a particularly dark spot, due to an accumulation of issues. The legacy of the Eurozone debt crisis is still hunting the most prominent European banks. The current pandemic and the huge economic contraction are affecting beyond any doubt, the valuation of banks’ assets.

Moreover, if watchdogs inflict new fees for money laundering, some banks may require more than a bailout. It is the case of Societe Generale, the leading French bank, its share trading at ten years low level. If banking stocks continue to dip, it could trigger additional issues, thereby amplifying the current crisis.

Focus:

Moderna

Moderna ended up in a semi-hiatus in early September when its stock price entered a period of decline. Moderna’s competitors engaged in the quest for a COVID vaccine showed promising results and Moderna became a proxy weapon in the political battle for the White House. If the vaccine is ready before November, it could play a crucial role in deciding the outcome of the election. The US president tested positive to coronavirus yesterday, and the evolutions of his condition juxtaposed with the vaccine approval could tip the scales in his favour. But Moderna’s CEO announced this week that its vaccine would be available not earlier than March 2021. Nevertheless, its stock price increased by 25% since mid-September, and the Massachusetts based company seems to hold the right arguments for its investors.

Commodities:

Oil

Winter approaches in the Northern hemisphere and in theory the energy prices should go up. But the second wave of the coronavirus pandemic might reshape the forward curve of the energy complex. Many countries are considering a second lockdown.

If this becomes a reality, it will be longer than March lockdown. The oil prices are already reacting, and over the past week, the Crude oil entered the negative territory and ended the week below 38 USD. The only sign of hope for oil prices is an early approval of a COVID vaccine.

Market outlook

Nasdaq rebounded above 11,000 while the Dow Jones lingered below 28,000 despite few sessions with positive returns. We expect to see the leading stock indexes starting a bearish pattern anticipating a significant swing in November.

The Gold ounce was indeed oversold, and investors rushed to lock-in long positions. We do not expect significant developments before the US elections, but Gold has a positive outlook in the long-run.  

As predicted, Bitcoin’s price ended the week at 10,500 level. The outlook is not optimistic, and the market sell could continue over the next week. Nevertheless, the results of the US election could reinstall the leafing crypto-currency in its safe harbour role, thereby attracting more investors.

General Disclaimer

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 instrument 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.