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BITCOIN BULLS, BEWARE OF FRACTAL DIMENSION! (1208 GMT)
Bullish on Bitcoin? Can't blame you - the world's biggest
cryptocurrency just crossed $35,000 on Wednesday, which already
puts it up 20% in the first week of the year.
But at least one indicator is flashing a warning sign,
suggesting the blistering rally may be on its last legs. Oh, and
it has an intriguing name: fractal dimension.
Eyes glazing over? Not to worry. Fractal dimension is simply
an indicator that attempts to capture trend reversals.
"What it tries to measure is when the investment horizon of
short-term traders and long-term traders pretty much coincide -
when they start to have exactly the same views," says Matheiu
Savary, global macro strategist at BCA Research.
Savary explains that fractal dimension is essentially a
ratio of short-term volatility of an asset price annualized
versus a longer-term measure of volatility of returns.
When the ratio reaches a point when long-term shocks and
short-term shocks are almost equal mathematically, it indicates
that both the short-term traders and the more long-term
investors are taking the same position.
This "increases the risk that you get a market trend
reversal, because essentially everybody is just positioned in
the same direction and there is no more market," Savary says.
BCA notes that with a reading near 1.25, the indicator is
"signalling prevalent groupthink behaviour, which trends to lead
to a trend reversal."
Bitcoin bulls beware!
LOCK, STOCK, BARREL IN ELECTION YEAR
Stock markets are a touch unnerved by news the Democrats may
be set to win both of Georgia's Senate seats, bringing about a
so-called Blue sweep in Washington DC. But for at least one set
of stocks -- makers of guns -- the prospect is not entirely
In the United States, an election year is usually a cue for
guns to fly off the shelves, more so if the incoming president
is expected to be Democrat and therefore likely to try and
tighten firearms legislation.
That's what happened last year when gunmakers Smith & Wesson
and Ruger enjoyed share price gains of 50% and 150%
respectively (in comparison, Microsoft and Amazon rose 40% and
80%) while ammo-maker Vista jumped a whopping 220%.
Gun enthusiasts had extra incentives to stock up -- rumours
of pandemic-linked rioting and the Black Lives Matter protests
fuelled an astonishing 40% surge in background checks on
prospective buyers by the Federal Bureau of Investigation,
Bespoke Investments notes.
The next closest year was 2012 with a 20.6 percentage point
rise, Bespoke said, adding: "While financial markets may hate
uncertainty, gun sales thrive on it."
So on election day, with Democrat Joe Biden tipped for
victory, shares in S&M and Ruger jumped 11% and 5% respectively.
A proxy for sales, figures on background checks on gun
buyers - knows as NICS data -- hit a record 3.94 million last
month on an annual basis, up from 3.6% in November, and
surpassing the 3.93 million record set in June.
Ruger CEO Chris Killoy noted in October https://www.fool.com/investing/2020/10/29/sturm-ruger-sales-earnings-soar-amid-unprecedented
that around 5 million firearm purchases -- 40% of the total --
were by first-time buyers by that point in 2020, calling a
"tremendous opportunity for growth in our industry."
Indeed, Sturm Ruger's Q3 revenue jumped 53% from year-ago
levels while earnings increased fivefold. At Smith and Wesson,
net sales rose 118% in the quarter to October. And both have
kicked off the first 2021 week with 7% gains -- outgunning the
S&P500 with its 0.7% fall.
REFLATION TRADE LIKES PERIPHERY (1138 GMT)
Now the question is what stocks are going to benefit most
from reflation trade, which might become the hot spot, should
the Democrats take control of the U.S. Senate and kick-start a
stronger than expected expansionary fiscal policy.
European peripheral countries might become more interesting
as “Germany and France have more balanced sector exposure than
Italy or Spain, but the periphery has a much higher exposure to
financials, which we think can benefit from the reflation
trade,” a Barclays research note says.
Besides we should not forget that the EU recovery fund will
benefit periphery the most.
“Core countries are less exposed directly to reflation and
have bigger weights in sectors we are underweight,” it adds.
Germany will benefit from a possible less antagonistic
global trade environment, though a rising euro can be a
“headwind for stocks.”
Barclays downgraded utilities but as a tactical move as it
likes “the secular renewables growth story.”
ESG’S MOST LOVED SECTORS (1033 GMT)
Environmental, Social, and Governance investing is becoming
more and more a hot topic, now more than ever as Joe Biden might
deliver on his promises to fight climate change if the Dems
should control the Congress.
So it might be interesting to know the moves that
institutional investors will make in 2021 in this matter.
A BofA survey found that climate change, including
renewables as well as governance and supply chains were the
top 2021 priorities for institutional investors.
The sectors that offer the biggest opportunities for ESG
improvement are Oil & Gas (49%), Utilities (44%), Consumer Disc
(34%) and Materials (31%), according to BofA survey.
Geographically speaking, Asia (41%) has the biggest
opportunities for outperformance.
Over 80% of respondents say ESG has a role in better
management of investment risks.
EUROPE IN THE BLACK ON A POSSIBLE BLUE WAVE (0833 GMT)
European equities are in the black as a possible Democratic
sweep after the runoffs in Georgia fuels expectations of an
expansionary fiscal policy in the U.S.
The NBC television network projected Democrat Raphael
Warnock the winner of his U.S. Senate runoff election against
Republican Senator Kelly Loeffler, while Democratic
challenger Jon Ossoff has taken a lead of about 3,500 votes,
according to Edison Research.
The Stoxx 600 index is up 0.1% with bank stock index
leading gains up 2.7%.
Oil and gas shares are up 1.9% as oil prices rose after
Saudi Arabia agreed to make bigger than expected cuts in output,
while industry data showed U.S. crude stockpiles fell last week.
Tech stocks are down 0.5% as its U.S. peers expect more
taxes and an anti-trust with the Dems controlling the Congress.
Shares in banks exposed to China are the Stoxx 600's best
performers with Standard Chartered AND HSBC up
around 4% after China stocks hit its highest level in nearly 13
years led by banks as investors expect the government to
continue its policy support.
A 'BLUE SWEEP' AFTER ALL? (0750 GMT)
Georgia... say no more about what is driving world markets.
Democratic challenger Raphael Warnock has won a hotly contested
U.S. Senate race in the state over Republican incumbent Kelly
Loeffler, TV networks and Edison Research are projecting.
With a second contest still undecided, which party will
control the chamber is up in the air. Yet markets appear to have
to have made up their mind, bracing for a Democrat win that
could pave the way for a big fiscal boost in the months ahead.
While stocks are down and Wall Street futures indicate a
weaker opening, expectations of a fiscal boost -- and reflation
-- are most pronounced in U.S. Treasury markets, where 10-year
yields have pushed above 1% for the first time since March, and
the yield curve us at its steepest since 2017. European bond
yields are tracking higher too in their wake.
Bitcoin meanwhile traded above $35,000 for the
first time, rising to $35,879 and extending a rally that has
seen the digital currency rise more than 800% since mid-March.
A deluge of economic data will give markets more to chew on;
French December inflation data and services PMI numbers for
major European economies.
The US ADP employment report will be watched closely ahead
of Friday's non-farm payrolls report.
Key developments that should provide more direction to
markets on Wednesday:
- Georgia Senate races that will decide fate of Biden's
agenda too close to call
-Andrew Bailey, the head of the Bank of England, speaks to
the Treasury Select Committee at 1400 GMT.
- Oil hits 11-month high after Saudi Arabia pledges
voluntary output cut
-Germany will issue 5 billion euros of 10 year Bunds; UK to
sell 3 billion pounds in 10-year gilts
- British baker Greggs slowed the rate of sales
decline caused by COVID-19 in Q4
-Trump places curbs on eight Chinese apps including Alipay.
But the New York Stock Exchange may reconsider plans to allow
three Chinese telecom firms to remain listed.
WAITING FOR GEORGIA RUNOFF RESULTS (0633 GMT)
A runoff election in Georgia which will determine which
party will control the U.S. Senate is still keeping financial
markets on edge, with European stock futures in positive
territory after yesterday’s slight fall.
Some analysts fear a Democratic sweep in the U.S. would lead
to an increase in corporate taxes hurting stocks, while others
think more fiscal stimulus will be good for equities in 2021
before the bill come due in 2022.
Vote counting in the two Senate races will resume in the
morning, and more should be known by noon (EST),
while most of U.S. news channels have said the race was too
close to call.