(06-25-21) The Churn: The market’s reflexivity

This week has been represented by a recovery in the Indices as a result of the purchase of assets from the Bank of England and the approval of structural agreements in the US government. The banking sector passed the stress tests positively, pushing the market to green numbers. Paraguay has proposed Bitcoin as legal tender. The oil market continues to rise despite the increase in production due to higher demand.

At the end of the week, the pound (GBPUSD) fell against the dollar, following the news from the British Bank to keep interest rates at historical lows of 0.1% and to continue with the 875,000 million asset purchase program. pounds. Even though the FED, and the Bank of England, indicate that they do not see inflation risks; UK inflation exceeds the 2% target. It is expected to reach 3% before recovering to the target value of 2%, while many sectors remain inoperative. It is plausible to wonder if the pound will continue to decline against the dollar (GBPUSD). To a large extent, the US employability news and Joe Biden's Thursday announcements are largely responsible for the results of this decline. Biden has made headlines after closing a bipartisan agreement with the Republicans, pushing ahead with his infrastructure development proposal by injecting 1.2 trillion into the system.

The Democratic president has proposed the end of a stage of economic doctrine established by Ronal Reagan, which has spanned four decades, betting on the welfare state. Faced with the allegations of the country's large businessmen, he stated that they should compete for employees by paying them decent salaries and should provide greater dignity and respect to the work environment. It places special emphasis on the rise in wages to meet the demand for workers that the country is experiencing, despite the millions of unemployed people suffering the effects of the pandemic, and they have sustained thanks to the economic stimulus packages approved by its government.

The US unemployment rate fell to 5.8%, the first time it has fallen below 6% since the start of the pandemic. This fits in with the president's proposals - not approved by the House of Representatives - to increase the minimum wage from $ 7.25 to $ 15 an hour in a phased manner over the next four years. His April executive order will require all companies hired by the government to increase the minimum wage for their employees to $ 15 an hour, which is an increase for thousands of workers.

There is a whole generation in the US that has never experienced this kind of inflation or destruction of purchasing power. The Personal Consumption Expenditures Price Index (PCE) has suffered its all-time high, rising to August 1983 levels with an inflation rate of 6.4%. This "lowball" is the lowest in the history of the United States since 1983. These circumstances indicate that inflation warmed up in the spring. According to the FED, the 2% objective is "symmetrical", showing that inflation will continue to rise for a time, despite its pre-pandemic value being less than 2%. To all, this must be added the price of energy and food. Which soared 3.9% according to Wolfstreet.

Luis de Guindos, vice president of the ECB, explained in Ondacero on June 24th, that "the rebound in inflation is punctual and we must trust that it will not become structural", concerning inflation in the area. euro.

These three pieces of news about inflation have made the week put to an end with many values in the same price ranges as the previous week. It has left North American indices at all-time highs and European indices very close to highs. Reactions in the markets have hardly been catalyzed, as the US inflation data has caused the market to be static on Friday. The exceptional news from Nike (NYSE: NKE) caused its value to skyrocket 15% after its quarterly report, showing expectations of reaching 50%. This move pushed the NYSE to green numbers. Dow Jones, has sought the way to an uptrend with a rebound at 33,270 points and seeking 34,321 points. It is expected to reach 35,000, a value that can act as resistance or support the continuation of this rebound.

The FTSE 100 has returned to its uptrend. Its correlation between exports and the rise in the price of the dollar is associated with a cheaper pound, so the rebound in the 55-day moving average at 7,000 points leaves a false break; as it did each time when passing through this point since February of this year. This support is the most relevant for this index; and the maximum that has been reached this year at 7,217 points, could become resistance. The German DAX has consolidated at the 55-day exponential moving average at 15,343 points, with an all-time high of 15,805 points.

The Stress Tests on US banks have been positive on Thursday, which has caused an increase in the price of banks that have global influence such as BBVA (MC: BBVA), Santander (MC: SAN), Deutsche Bank (DE: DBKGn), Citigroup (NYSE: C), or Wells Fargo (NYSE: WFC)

Soros's theory of reflexivity (1987-Alchemy of Finance), proposes a non-linear explanation of markets. Thought and reality have a two-way connection, acting simultaneously, this introduces an element of uncertainty in the thinking of the participants and an element of indeterminacy in the course of events. This previous explanation helps me to express how the current market becomes "The Churn",- as James SA Corey's book called "The Expanse" -, that is, space where everything important unfolds, to put it briefly.

In this context of a strong growth cycle, befallen by processes of flattening of the curve; and where the policy of the FED is to seek a halt to uncontrolled inflation -as of next year-, "assuming" that it is not structural; just as Europe or the United Kingdom want to assume, it is something ridiculous. You can evoke the moment of Carlos Sainz in the World Rally Car, "Carlos, try to start it, by God!".

It is very likely that there will be a strong recession after the great drunkenness of aid issued by central banks. They will want to cover with more taxes and pretend that the stimulus is over when the reality is that they do not know what to do to stop it. They simply dedicate themselves to prolonging the situation by providing aid for as long as possible, in the hope of recovering the economy; which is not going to be four days from now, as politicians suggest. The uncertainty they are trying to hide is obvious. The events that have caused rampant unemployment across the planet - due to the pandemic and inappropriate policies - are generating this great bubble in the business cycle.

Possibly the defensive sectors (banking, industrials, materials, and energy), benefited by the tapering -reflation- will end up being affected as a result of a flattening of the yield curve. This is because they are the most dependent on this artificially inflated bubble economy. Last week it was possible to see how the news from the FED affected its bonds, dragging Europe down. This situation can be corrected, "in theory", based on the planned rate hikes; and assuming that the problem is not structural and that the economy is not going to slow down in the future, due to restrictive monetary policies.

It is obvious that Soros Fund Management continues to hold a large base of companies in the aforementioned sectors to realize that they assume that the hangover is going to take a long time to arrive. Therefore, they will continue to drink from state aid, given that Soros has discounted a favorable environment for increases and economic growth.

The Bitcoin (BTCUSD) has not been long in its momentum after the news of the infrastructure agreement, which has been added to the new bill on BTC in Paraguay - added to the news of El Salvador last week -, spread on Twitter. These have caused BTC to take off to $ 35,289 and fell back slightly below the resistance level.

(investing) JPMorgan (NYSE: JPM) expects stocks to rise slowly as markets relax on inflation risks. The company claims that cryptocurrencies will suffer volatility. This market has lost $ 1 trillion of market capitalization since its peak of 2.5 trillion in early May. The sign of the biggest challenge for BTC, according to Grayscale Bitcoin Trust - Bitcoin's largest fund - is discounting the value of net assets that have expanded into negative territory. This reflects the anticipated sale of trust shares in the secondary market when a lockdown period for investors ends. June and July will be key, since a sale of some GBTC shares is likely, and this may affect the price of this cryptocurrency and the markets in general.

Despite the Chinese government's news on Bitcoin bans on the production of bitcoins in their country, bitcoin has not had a bad week. Andreessen Horowitz has launched a $ 2.2 trillion crypto-asset megafund. The largest banks in the world are considering offering cryptocurrencies for their clients. (decrypt) Morgan Stanley (NYSE: MS) has shown its support for security tokens, following the acquisition of Securitize with $ 48 million dollars and co-directing its financing in series B. It is a company that converts assets such as properties or shares into exchangeable crypto-tokens. These types of technologies will extend their development on the blockchain and have pushed the price of bitcoin higher.

The correlation between Gold (XAUUSD) and BTC (USDBTC) makes the Crypto market face new elements against it. JPMorgan is not the first to point out that Bitcoin has a theoretical price of $ 140,000 - others priced it higher than $ 200,000. They are based on the convergence of the volatility of bitcoin with gold, the volatility of 0.12%, and the equalization of allocations of Bitcoin and gold in the investment portfolios. According to its experts, its expectations are to reverse its volatility index close to “x6” in the medium term and drop to “x4” by the end of the year, since its value at four times the volatility of gold is $ 35,000. holding the current price of $ 33,959.

Ethereum (USDETH) is down 20% more since its maximum decline in TVL in the Defi ecosystem. All specialists believe that the price is clearly supported due to the owners who keep their cryptocurrencies. Its price has been sustained at $ 1,988 USD.

(Bloomberg) Crypto-Options are flourishing and their volume has exploded from $ 50 Million in January to $ 1.4 Billion in May. Market-Maker companies focused on quantitative strategies are making great returns. LedgerPrime, a $ 130 million fund, reported 80% earnings this year.

The West Texas oil price (USDOIL) has undergone a growth process to $ 74, revaluing 3% compared to last week, already chaining the fifth consecutive week on the rise. This is due to the good demand outlook in Western countries, which are experiencing an increase in travel and leisure from the economic reopening. To this can be added the effect of the Biden agreement, and the weekly fall in US crude reserves - higher than expected - of 7.6 million, which has managed to boost the price. Next Thursday, July 1, will be key because of the meeting that OPEC and its allies will hold to set production strategies. The expectation is to open the taps from August.

(investing) Stephen Brennock of PVN specifies that the group has ample room to boost supply without derailing the reduction in oil inventories. The negotiation of the nuclear pact can cause prices to change if sanctions on Iran are lifted and its crude returns to the market. The price of Brent (UKOIL) was around $ 76 at the end of the session, following the same dynamics as US crude. The crude from the North Sea has concluded the day in the International Exchange Futures with an increase, we already have our sights set on $ 80. (investing) Luis Dickson of Rystad Energy says that demand growth expectations will be around 3 million barrels per day between now and the end of the summer. According to the expert, even though demand will increase, this bearish scenario will not be destructive to prices, so demand will rise and absorb the additional barrels.

 Happy Trading and Happy Friday!

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* This article only expresses my opinion and under no circumstances represents an investment recommendation, but a merely educational document.