Pricing Fear

By Marius-Cristian Frunza
Weekly Briefs

The stock market entered a slowly descending path after reaching a historical climax amid a global crisis, which does not seem to get to an end. Markets are supposed to reflect the valuation in the light of the circumstances at a given moment. So, what are the markets evaluating right now? What do they price in terms of information?

The sharp economic recovery is history, and the shadow of a second lockdown is approaching quickly. Geopolitical turmoil and social unrest make the equation more complicated. Overall, fear seems to be the driving force of all aspects of social and economic life. Markets are indeed pricing the fear element, conditioned by the fact that a lot of liquidity is pouring from central banks. What is the first reaction of a human facing a high level of stress when served with huge amounts of sugar? It is to eat as much as possible. Similarly, investors coped with the ravishing fear by purchasing all type of shares using the available liquidity.

Somebody might need to pay at one moment the price of fear, and the bill could be bitter.

Nothing in life is to be feared. It is only to be understood. Marie Curie, French Nobel prize winner

Market overview

The Dow Jones, along with the leading stock indexes, entered a downward trend that started in September. Needless to say, that in September the market was overbought and witnessing a correction was just a matter of time. The Dow Jones is still above 27,000, while the worst prognosis in March indicated foreseeable values 10,000 points below the current level.

Markets can exhibit irrational or biased behaviours for some time, but in the long run, they should reflect the actual state of the real economy. It is exactly what markets try to do right now.

The strategy employed by central banks is to avoid a sudden dip in market valuations that could be fatal for many industries. A slower descent would avoid catastrophic trajectories such as those that created turmoil amid the 2008 crisis.

One event may shake this strategy, and it is linked to the massive depreciation of financial stocks amid FinCEN leaks. If new penalties are inflicted to banks following the publication of suspicious activity reports, the capitalisation of the leading financial companies will plummet. This effect juxtaposed over the foreseeable real estate crisis does not bring a lot of optimism in the market.

Focus:

Palantir

Palantir, the leading provider of solutions for tackling financial crime, is planning to go public.  The circumstances are optimal for its listing.  The recent FinCEN leaks depict an apocalyptic picture of the banking world infiltrated by criminals, dictators, and terrorist. Thus, Palantir is targeting a valuation that could reach two dozen billion dollars. If this is justified, Palantir will become the new Google that tracks money laundering.

Moreover, Palantir seems to opt for a direct listing instead of a traditional IPO. If this becomes a reality, Palantir will be the most prominent firm going public through a direct listing. It could mark the beginning of the decline for the capital markets divisions in investment banks.

Focus:

Nikola

Nikola Tesla’s legacy inspired many scientists and a few entrepreneurs. The inspiration went to such level that two companies took his first and last name, respectively. The two companies operate in the automotive industry promoting electric vehicles. Whilst Tesla seems to have inherited a sparkle of the iconic inventor’s genius, Nikola is going through a long series of debacles and has most likely a negative outlook.

Thin revenues, conflicts with Tesla and weak management are a few of the reasons Nikola’s share dipped continuously since July. Prior to Nasdaq’s rally, Nikola was almost a penny stock. Tesla’s relative success, along with the massive inflow of retail liquidity on tech stocks, created a bubble that is currently exploding. We can expect a class action somewhere next year filled by unhappy investors.

Cryptocurrencies:

Ethereum

Ethereum-based technologies gain traction in the world of digital currencies.  Hong Kong’s financial regulator aims to develop a central bank for cryptocurrencies. The Hong-Kongese market watchdog selected ConsenSys, a start-up specialized in Ethereum blockchain services, to build the infrastructure for a digital central bank.

Despite this encouraging news, Ether continued its evolution into negative territory started in early September. Bitcoin’s incapacity to develop momentum had a bearish influence on other leading cryptocurrencies. Bitcoin’s price dipped below 11,000, and this triggered a sell-off. It might be the right timing to go in the market and accumulate long-run positions.

Commodities:

Gold

Central banks are printing massive amounts of monies since March, and interest rates are at an all-time low. Theoretically, Gold price should explode, and it is indeed what happened during the summer. Since mid-August, Gold ounce depicts a clear negative trend, and last week it plunged below the support level of 1,900. The move is counterintuitive because Gold should be a safe harbour amid turbulent times.

This could be a prevailing signal across markets, suggesting that a slow sell-off is going on and financial markets may enter an extended bearish period. Such a negative trend would aim in the long run to correct the bias introduced by the market pumping that occurred during the summer. A slower descent would give sufficient time to the big players of the real economy to adjust their financing and to avoid sudden bankruptcies.

Market outlook

Nasdaq lingered below 11,000 and the Dow Jones remained below 28,000 despite a strong rally in the last trading session of the week. The leading stock indexes follow a bearish pattern that could continue at least until November.

The Gold ounce dropped below 1,900 USD and is most likely oversold. The situation might not change in the short term, but investors should come back sometimes before the US elections.  

As predicted, Bitcoin’s price continued to swing below the 11,000-resistance level. The outlook for a comeback is not optimistic and the market sell could continue over the next week, thereby following the trend of the traditional markets.

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.