Understanding Markets

Almost two months into my internship at Masterlink Securities, I want to consolidate on the things I have learnt throughout this rewarding experience. I especially enjoyed my time in the macroeconomics research team, where I learnt the usefulness of tracking different economic indicators to gauge market sentiment and help forecast market movements. I will summarise how the macroeconomics team thinks about equity markets and the indicators we look at.  3 Main Drivers of Equity Markets 3 Main Drivers Economic Fundamentals, Monetary Conditions, and Pricing On a very coarse level, the equity market is most often influenced by economic fundamentals and monetary conditions. The most significant drivers change all the time as macroeconomic events occur, so it is important to keep a wide perspective and understand the reasons behind these relationships.  Next, I will explain the indicators I look at when trying to understand and forecast the market. Economic Fundamentals Indicators In...

On March 5th, I published a blog post titled “Bitcoin Revisited: Why I am Still Bearish,” in which I made a case for shorting Bitcoin. Despite my prediction, the cryptocurrency has since risen by approximately 30%. However, I ultimately refrained from shorting Bitcoin due to the poor track record of the only investment vehicle available: the ProShares Short Bitcoin Strategy ETF. This fund failed to rise even when Bitcoin declined. For more information, please refer to my original post. Recent developments have led me to reconsider my stance and open a short position in Bitcoin. Despite the uncertain nature of the investment vehicle, I now believe that the potential upside outweighs the risks. Scenarios 1. US economy remains robust overall, inflation remains sticky, rates keep rising : The US economy remains robust overall, with persistent inflation and rising interest rates. St. Louis Federal Reserve President James Bullard has hinted at this possibility.   Probability: 40% (self...

There are many people who believe that inflation is on its way down and will soon return to 2%. While many people have pointed to the adjustments to the various short-term pressures that have caused inflation to spike since last year such as the war in Ukraine, the supply chain disruptions in China, and the tight labour markets in the US, I believe inflation is here to stay for the long-term, and it would be difficult to get back to the 2% environment. Geopolitical Tensions The shift in businesses’ focus from efficiency to resiliency post covid is inflationary in the long run.  While the theory of competitive advantage dominated in the 2000s and 2010s, national security and supply chain resiliency are top of mind these days. Supply chain disruptions caused by covid lockdowns have exposed the risks of just-in-time supply chain management. Rising US-China tensions have convinced more businesses to restore their production facilities despite the associated higher costs. The technologi...

HOW EQUITIES VS RATES MARKETS TELL DIVERGENT STORIES If there is one word to describe market sentiment this year, it is confusion . The S&P 500 rallied 9.3% in January before retracing its steps back where it started. It is now 0.98% above what it was on the 1st of January.  Major banks are divided in their market outlook in 2023, most falling into either the soft-landing or the hard-landing camps. In this publication, I will examine the divergent stories told by the equities and rates markets to argue that the market is just as confused right now as it ever was. The key source of confusion is the change in the global monetary regime since 2021. The US market has not seen a stagflationary environment since the 1980s. Due to the significant changes in the monetary landscape and the lack of historical precedents, the market requires sufficient time to adapt to the new conditions and accurately value assets.  Stock Market: Going for A Soft Landing The S&P 500 currently tr...

The Case for Shorting Bitcoin Rising Carry Cost Bitcoin’s carry cost has risen sharply over the last year as the yields on US 10-year treasuries shot ever higher. However, while yields have risen by over 340 basis points since July 2020, Bitcoin has also appreciated by 102%. All else being equal a rise in carry cost should lead to a lower price. This is one reason that supports a price correction going forward. Moreover, yields may go higher. Going back to Bridgewater’s view of sticky inflation going forward, yields on risk-free assets are expected to remain high if not climb even higher. The Federal Reserve has also said that they are willing to keep rates higher for longer to bring inflation down to its target of 2%. The only conceivable scenario where the Fed eases rates this year is if the market enters a deep recession. Goldman Sachs believes this scenario is unlikely, moreover, even if the economy is hit with a big recession, it is just another catalyst for Bitcoin prices to nos...

Key Catalysts US Dollar US Interest Rates vs Foreign Interest Rates US Growth vs Foreign Growth My thoughts The US dollar has been strong this year but it has begun heading down due to the slowing of the Fed's tightening cycle. The Fed is likely to slow its rate hike and eventually pause mid-next year. The reasons for this are US consumer price inflation eased more than expected in November Economic growth should slow as the rate hikes delivered this year by the U.S. finally begin to manifest their lagged effect on the economy Cost-push inflation is likely to ease as s upply chains are also finally normalizing as the world is getting back to normal following the pandemic, China reopening Global economic recovery, economic recovery in China benefit a whole range of different economies, emerging markets included will help push the dollar down The Case for Emerging Market Sovereign Credit We have seen emerging market sovereign credit fall precipitously in 2022 due to Rising U.S. real...