The hand of God

By Marius-Cristian Frunza
Weekly Briefs

Markets are booming, and investors are cheering amid a devastating second wave of the coronavirus pandemic. The current situation requires to redefine what risk can mean to people. Risk is a theoretical concept related to uncertainty.  The potential negative evolution of market prices in uncertain conditions should be reflected at least in theory when measuring risk. Risk metrics do not provide currently with relevant information. So, what tools should an informed investor use to manage risk?  

Political turmoil in the White House, questionable vaccine and tensed geopolitical situations... These are only a few factors that would drive uncertainty in most efficient markets. But, the volatility index is at its lowest level since the pandemic outbreak. An unadvised reader could think that God’s hand is driving markets up and keeping volatility low. The reality is slightly different. The market, as we see it now, is not the same as it was one year ago. Governments decided to step out of their traditional role and became active players in the stock market. Therefore, central banks became massive hedge funds. Compared to the traditional investment banks, a hedge fund aims to extract profits from financial markets by using alternative tools. It is exactly what central banks do. There is one subtle consequence. The currency representing share prices on the leading markets is not fungible with the currency used in the real economy.

Risk is something that will go beyond the traditional boundaries of the financial markets and will impact all walks of life. Managing risk is not anymore a science, but an art. Sharpe ratio, Value at Risk and other metrics may not make much sense in the current situation. A comeback to traditional tools needs to be envisaged. Reading the financial statements of a company and looking at the big macro-economic picture are crucial elements in a sound risk assessment. Moreover, an investor should distinguish between short- term and long -term risk. Whatever works in the short term may fail when extrapolated over a longer horizon.

You can say a lot of things about me, but you can never say I don't take risks. Diego Maradona

Market overview

Trump announced that he is considering transferring the power to the elect president Biden. It brought significant relief to investors fearing a power struggle in the White House, which could put the United States in turmoil. The Dow Jones briefly reached the psychological level of 30,000, only eight months after it went below 20,000 during the initial phase of the COVID-19 crisis. Bitcoin followed the momentum started in the past weeks and claimed above 19,000 USD. The leading cryptocurrency lost over 2,000 USD in only two trading sessions amid technical sales.

Focus:

AstraZeneca

Moderna’s price is going through the roof amid the clinical test results of its COVID vaccine. Meanwhile, AstraZeneca one of the main competitors in the vaccine race saw its share moving into negative territory. The British–Swedish multinational pharmaceutical firm announced that its vaccine had a few issues, and the testing results may be biased. The initial outcomes of the clinical tests underlined that AstraZeneca’s vaccine had a 70% efficiency, lower that the solutions proposed by its peers. Nevertheless, AstraZeneca’s vaccine has less logistical issues and does not require storage at a very low temperature. Seemingly,  Moderna and Pfizer are currently leading the race for a vaccine, while AstraZeneca is looking for redemption.

Focus:

Airbnb is the next star

Airbnb, the vacation rental online marketplace company, based in San Francisco, is preparing for IPO. Needless to say, many retail investors are looking for the next hot stock. Moreover, Booking, Airbnb’s main competitor is doing just fine, and its share recovered entirely after the losses incurred during the pandemic outbreak.  This should be a positive signal, but Airbnb faces several profitability issues. The company is not yet in a position to pay dividends because it is not yet generating profits. Moreover, in many European countries property rental via online marketplaces may be hindered by additional taxes.

Focus:

Amazon

The lockdowns implemented in most developed countries hindered traditional commerce and boosted the online marketplaces. Amazon was a leading platform in the pre-COVID world, and the pandemic contributed to reinforce its position. Amazon’s price had a strong rally during the summer and went into a stalling period since September. The foreseeable growth opportunities seem to be limited in the eyes of investors. The bigger you are, the harder it is to grow.

Cryptocurrencies:

Ethereum

Bitcoin went through a second rally and reached almost a new maximum. The momentum impacted the other Altcoins, including the second cryptocurrency in terms of capitalization. Ethereum’s price bolstered amid the liquidity inflow on the Bitcoin market.  Ethereum is from far the most popular infrastructure for distributed services and assets’ tokenization. Nevertheless, the enthusiasm around Ethereum is far from what it was to be three years ago. The current rally did not bring the price to a comparable level to Ethereum’s historic maxima.

There is a clear separation line between Bitcoin and Altcoins in terms of attractiveness for new investors. Bitcoin seems to have the upper hand in this game.

Market outlook

The Dow Jones continued its rally and reached 30,000USD. The market cheers for Biden and the foreseeable stimulus package. The perspective of a COVID vaccine contributes to the market euphoria.

Bitcoin's rally continued, but the leading cryptocurrency had massive losses plunging below 17,000. Investors got scared of seeing the 2017 episode reloaded and hurried to get their profits. There is still potential for Bitcoin to expand. The bullish trend did not reach its end yet.  Thus, Bitcoin is becoming slowly but surely a leading asset in the investment, and we expect to see Bitcoin rising towards 20,000 in the early days of 2021.

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.