John Authers is a senior editor for markets. Before Bloomberg, he spent 29 years with the Financial Times, where he was head of the Lex Column and chief markets commentator. He is the author of “The Fearful Rise of Markets” and other books.To get more news about WikiFX, you can visit wikifx.com official website.
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Counting Votes, and Selling Dollars
Like many people, I have Georgia on my mind at the time of writing. The big set piece that we could see coming years ago, the November Federal Open Market Committee meeting, came and went with almost no market reaction. Instead, the U.S. election, and the growing probability that Georgia of all places will deliver the presidency to Joe Biden, has dominated discussion throughout the day. Just like the last election, it has prompted a surge in risk assets, as there is relief that the election is over — even though, just as in 2016, the policy that will likely result is very different from what had been expected.
The moves across markets are unambiguously “risk on.” Risk assets are doing well across the board. However, in both bonds and equity markets, the reaction remains within the recent ranges. So lets focus on the exceptions, which are in the zero-sum world of foreign exchange.
According to Bloombergs broad dollar index, the action of this week has brought the U.S. currency to its weakest in 30 months:
Donald Trump consistently wanted a weaker dollar, and was aggrieved by the currencys upswing from the summer of 2018 onward. It looks as though a weaker dollar, bringing with it help for exporters, is arriving just on cue to help a possible President Biden. A stronger currency did boost the performance of U.S. equities compared to the rest of the world. For the last two years, however, that outperformance has been mostly due to the remarkable U.S. tech industry. With a weakening dollar, as last seen in 2017, non-U.S. stocks have a chance to outperform:
The Trump era was particularly tough for emerging market currencies. JPMorgans emerging market FX index had at one point dropped more than 20% against the dollar since election day in 2016. On Thursday, it surpassed its 200-day moving average for the first time in more than a year. For now, markets are operating on the belief that a Biden administration hemmed in by congressional gridlock is just what emerging market currencies need:
This could be positive, as devaluations on this scale usually leave strong GDP growth in their wake. They are also very unusual. Research from the Institute of International Finance suggests that Argentina and Brazil in particular should be well placed:
Meanwhile, the strategy team at Citigroup Inc. ran the cross-correlations between emerging market equities and a weak dollar. This exercise also reveals that Brazil should do particularly well. Japan, still treated by markets as though it is totally reliant on exporters, does badly from a weak dollar:
The most important factor boosting emerging markets is simply that the event risk of the U.S. election is now behind us, and so particularly risky assets can now rally. Dirk Willer of Citi commented in a note that this behavior is reminiscent of an emerging market election: “The underlying reason is that risk had been reduced before the event, leading to a (minor) market pull-back. And, as we had stated prior to the election, after the event goes away, risk markets go up, irrespective of the actual outcome.” To underline this, some of the worlds best performing assets since Wednesday night have included short-dated bonds from Brazil and Egypt, which at least in theory should barely be affected by American politics. As Willer put it: “This illustrates that investors just wanted to make sure that VIX is not exploding higher on Election Day, only to then put on their favorite trades that they always wanted to have on the books in the first place.”
Some of the market action can be dismissed much this way; it is selling the rumor and buying the news. If the argument that gridlock will mean more protracted easy money from the Fed is valid, however, and other countries become more fiscally aggressive, that should mean a weaker dollar. And that should buoy the emerging markets.
One other asset has broken decisively out of its recent range: Bitcoin. It is now at its highest since the top of the last bubble in late 2017. Like gold, bitcoin is an asset with no obvious intrinsic value. Valuing it is surpassingly difficult, particularly as monetary authorities might yet attempt to close the entire endeavor down.
But it has been around long enough now for some broad price trends to emerge. Charlie Morris, a City of London veteran who is now the CIO of ByteTree in the U.K., suggests that it is beginning to behave more and more like a growth stock. First, he shows that it has a distinct relationship with the dollar. As might be expected with a currency, it strengthens when the dollar weakens:
Further, it also has a specific relationship to easy money. This chart shows the size of the four main central banks‘ balance sheets compared with Bitcoin’s price since 2011. The cryptocurrency was meant in many ways as a guard against debasement of fiat currencies, so this shouldnt be surprising — and its latest spurt comes as the Bank of England announced a new round of asset purchases Thursday.
Unlike Apple Inc. or Amazon.com Inc., Bitcoin doesn‘t reliably produce huge profits. It doesn’t reliably throw off any cash at all. But Morriss theory is that it is benefiting from a network effect. As more people use and trade with Bitcoin, it is gaining in value. Added to this, it gains when markets become more positive about risk. As Morris puts it: “Bitcoin is a reliable risk-on asset and has tended to outperform pretty much everything when general asset prices are rising. Having no CEO or profits, which can disappoint, can have its benefits.”
The snag is that Bitcoin performs better when real rates are rising. That might explain some of its recent uptick. The election has cast doubt on rising real yields. Still, the way Bitcoin has moved in tandem with the FANG stocks this year is remarkable. Bear in mind that these assets have virtually nothing in common. The FANGs are open to a swath of institutions that cannot touch Bitcoin: