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ASIAN STOCKS RISE ON HOPE OF FURTHER EASING, SHINZO ABE COMMITS TO CUT CORPORATE TAX

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ASIAN STOCKS RISE ON HOPE OF FURTHER EASING, SHINZO ABE COMMITS TO CUT CORPORATE TAX

By Arnaud Masset, Market Analyst, at Swissquote

The US dollar erases previous losses against most G10 currencies while commodity currencies bounce back as investors seek riskier assets. The Japanese Nikkei is the biggest winner in Asia this morning as the index is up 7.71% in Tokyo while the broader Topix index gains 6.40%, erasing most of last week’s losses in just one trading session. In China, mainland shares are also buoyed with the Shanghai Composite gaining 1.32% and the Shenzhen Composite jumping 2.08% as investors bet on further policy stimulus from Asian central bankers. The Hang Seng index is not left out as Hong Kong shares rise 3.72% while in South Korea; the Kospi index reaches a 1-week peak, up 2.96% to 1,934.20 points as August unemployment rates printed well below expectations at 3.6% versus 3.8% median forecast.

***Yann Quelenn, Market Analyst, Swissquote: “At an event that was held yesterday in Tokyo, Japan’s Prime Minister Shinzo Abe declared that the effective corporate tax rate of about 35% will be cut by next year by at least 3.3%. Abe stated that he is willing “to go beyond that if possible”. Indeed, for the moment “Abenomics”is not living up to expectations. Consumer spending is very low and the country is struggling to exit a 20-year period of deflation. As we see it Abe is now grasping at other ways to stimulate the Japanese economy as “Abenomics” is clearly failing to provide the necessary results. On Tuesday, the final read of the second quarter GDP came in at -0.3% quarter-on-quarter, improving by 0.1% from the first print. Furthermore, the annualized GDP deflator diminished by 1.5% from the first read of 1.6%. Prices are still increasing but at a slower pace.

We believe that Japan’s economic strength is of serious concern. Despite all measures provided by “Abenomics” – in particular the money waterfall -, there is no current pickup in inflation. The Bank of Japan’s inflation target of 2% is still quite distant. However, Governor Kuroda remains confident and Central Bank officials maintained their view that the pace of asset purchases will not be increased. We remain bullish on the USD/JPY. Over the past few weeks, the yen has strengthened on markets pricing in a later rate hike. Nonetheless, Shinzo Abe is running out of arrows and there is no clear path to recovery ahead. 122 seems a decent target.”***

Australian stocks are no exception. The S&P/ASX is up 2.07% in Sydney while the Aussie is back above 0.70 against the greenback, despite Westpack consumer confidence falling 5.6% in September after a July increase. AUD/USD is up for a third day straight, rising 2.20% to $0.7050, as iron ore futures (for January 2016) soared, gaining almost 6% over the same period. On the upside, the next key resistance stands at 0.7206 (high from August 28th), while on the downside, the September 4th low of 0.6908 will act as support.

The Kiwi is the other big winner this morning with gains against all G10 currencies. The New Zealand dollar is up 1.11% against the JPY, 0.98% vs. the EUR, 0.97% vs. the DKK, 0.82% vs. the Swiss franc, 0.74% vs. the GBP and 0.60% against the greenback. In the equities market, New Zealand shares closed up 1.09% to 5,671.42. The RBNZ is expected to cut its official cash rate by 25bps to 2.75% at tonight’s meeting.

In Europe, equity futures follow the Asian lead and are up 2% on average. The Euro Stoxx 50 is up 2.22%, the DAX 2.03%, CAC 40 2.11% and the SMI 1.88%. EUR/USD has proven unable to consolidate previous gains and is back below the 1.12 threshold. On the downside, the September 3rd low of 1.1087 will act as a second-class support while a stronger one can be found at 1.0809 (low from July 20th). On the upside, the euro has some room to manoeuvre as the strongest resistance lies at 1.1514 (fib 50% from December 2014 – March 2015 debasement).

It will be a busy day for the cable as a fresh batch of economic data is due in the UK today. July’s industrial production is expected to rebound from a 0.4%m/m contraction in June to a 0.1%m/m expansion. Manufacturing production is expected to remain stable at 0.2%m/m. GBP/USD bounced back to 1.5379 from 1.5165 (last week low) and is now taking a breather, slightly below the resistance standing at 1.5415 (Fibo 38.2% on August September debasement). We remain bullish on the cable as we see an overcorrection of the GBP against the USD. We expect the cable to return to between 1.56 and 1.58 over the coming weeks.

Besides UK data, traders will be watching MBA mortgage application and JOLTS job opening from the US; housing stats and building permits from Canada; RBNZ interest rate decision in New Zealand.

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Cryptocurrencies: the new gold?

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Cryptocurrencies: the new gold? 1

By Gerald Moser, Chief Market Strategist, Barclays Private Bank

Time to add to a portfolio?

There has been a lot of talk about bitcoin, and cryptocurrencies in general, being a “digital” gold. Similar to gold, there is a finite amount, it is not backed by any sovereign and no single-entity controls its production. But for bitcoin to be considered in a portfolio and to become an investable asset, similar to gold, the asset would need to improve the risk/return profile of that portfolio. This seems a tall order.

While it is nigh on impossible to forecast an expected return for bitcoin, its volatility makes the asset almost “uninvestable” from a portfolio perspective. With spikes in volatility that are multiples of that typically experienced by risk assets such as equities or oil, many would probably throw the cryptocurrency out of any portfolio in a typical mean-variance optimisation.

Cryptocurrencies: the new gold? 2

Poor diversifier

And while bitcoin’s correlation measures are relatively supportive, it seems to falter when diversification is most needed, such as during sharp downturns in financial markets. Looking at weekly return correlations since 2016 shows that bitcoin is not strongly correlated with any assets (see below). It is however only second to US high yield in its correlation with equities. US Treasuries, gold and US investment grade were better diversifiers than bitcoin when it comes to equities.

Source: Bloomberg, Barclays Private Bank

Source: Bloomberg, Barclays Private Bank

Furthermore, looking at global equity corrections since 2015 (see below), it is noticeable that bitcoin has performed even worse than equities over the last three corrections. And while gold and fixed income provided some relief during those corrections, bitcoin compounded the loss that investors would have incurred from equities exposure.

Source: Bloomberg, Barclays Private Bank

Source: Bloomberg, Barclays Private Bank

The fact that cryptocurrencies also fluctuate alongside equities suggests that investment in bitcoin is more akin to a bubble phenomenon rather than a rational, long-term investment decision. The performance of the cryptocurrency has been mostly driven by retail investors joining a seemingly unsustainable rally rather than institutional money investing on a long-term basis.

Several studies around market structure have shown that emerging markets with high retail/low institutional participation are more unstable and more likely subject to financial bubbles than mature markets with institutional participation. And while more leading financial houses seem to be taking an interest in cryptocurrencies, the market’s behaviour suggests that the level of institutional involvement is still limited. Another issue is around its concentration: about 2% of bitcoin accounts control 95% of all bitcoins.

In summary, difficulty to forecast return, lack of diversification and high volatility makes it hard to consider bitcoin as a standalone asset in a diversified portfolio for long-term investors.

An inflation hedge?

Another point widely quoted in favour of cryptocurrencies is that they provide an inflation hedge. This might be a valid point, if inflation stems from fiat currency debasement. As mentioned above, a currency’s worth comes from the trust economic agents have in it. If unsustainable amounts of debt and large money creation shatter belief in sovereign-backed currencies through spiralling inflation, cryptocurrencies could be seen as an alternative.

Regardless of its price, bitcoin’s production is set on a precise schedule and cannot be changed. If oil or copper prices go up, there is an incentive to produce more. This is not the case for cryptocurrencies. In a very specific and highly hypothetical scenario of all fiat currency collapsing, this could be positive. But other real assets such as precious metals, inflation-linked bonds or real estate usually provide a hedge against inflation.

Other considerations

Bitcoin’s technology should theoretically make it extremely secure. As there is no intermediary, each transaction is reviewed by a large number of participants which can all certify the transaction. However, there have been frauds and thefts from exchanges. Another point to consider is the risk of “losing” bitcoins. According to the cryptocurrency data firm Chainanalysis, around 20% of the existing 18.5m bitcoins are lost or stranded in wallets, with no mean of being recovered. As there is no intermediary, there is no backup for a lost bitcoin.

From a sustainability point of view, adding cryptocurrencies to a portfolio will make it less green. Mining and exchanging them is highly energy intensive. According to estimates published by Alex de Vries, data scientist at the Dutch Central Bank, the bitcoin mining network possibly consumed as much in 2018 as the electricity consumed by a country like Switzerland. This translates to an average carbon footprint per transaction in the range of 230-360kg of CO2. In comparison, the average carbon footprint of a VISA transaction is 0.4g of CO2.

Beyond energy use, the mining process generates a large amount of electronic waste (e-waste). As mining requires a growing amount of computational power, the study estimates that mining equipment becomes obsolete every 18 months. The study suggests that the bitcoin industry generates an annual amount of e-waste similar to a country like Luxembourg.

Cryptocurrencies are here to stay

Innovation in digital assets continues rapidly and will likely drive increased participation, both from retail and institutional investors. The underlying blockchain technology behind bitcoin was meant to disrupt a few different industries. While results have not lived up to the initial hype, more sectors are investigating the use of the technology.

And with Facebook announcing a stablecoin, or a cryptocurrency pegged to a basket of different fiat currencies, central banks have accelerated the movement towards central bank digital currencies. Those could improve payment systems resilience and facilitate cross-border payments.

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Energy stocks drag down FTSE 100, IG Group slides

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Energy stocks drag down FTSE 100, IG Group slides 3

By Shivani Kumaresan

(Reuters) – London’s FTSE 100 slipped on Thursday, weighed down by falls in energy stocks as oil prices slid after a surprise increase in U.S. crude inventories, while IG Group tumbled on plans to buy U.S. trading platform tastytrade for $1 billion.

The blue-chip FTSE 100 index lost 0.4%, while the domestically focussed mid-cap FTSE 250 index also slid 0.4%.

Energy majors BP and Royal Dutch Shell fell 3.2% and 2.5%, respectively, and were the biggest drags on the FTSE-100 index. [O/R]

“What is holding back the UK is a lack of tech stocks to capture the ‘rotation’ back into tech seen since Netflix results,” said Chris Beauchamp, chief market analyst at IG.

“Stock markets overall are much quieter today, looking so far in vain for a new catalyst for further upside.”

The FTSE 100 shed 14.3% in value last year, its worst performance since a 31% plunge in 2008 and underperforming its European peers by a wide margin, as pandemic-driven lockdowns battered the economy and led to mass layoffs.

British Prime Minister Boris Johnson said it was too early to say when the national coronavirus lockdown in England would end, as daily deaths from COVID-19 reach new highs and hospitals become increasingly stretched.

IG Group tumbled 8.5% after announcing plans to buy tastytrade, venturing into North America after a stellar year for the new breed of retail investment brokerages.

Ibstock jumped 7.3% to the top of the FTSE 250 after the company said fourth-quarter activity benefited from better-than-expected demand for new houses and repairs.

Pets at Home Group Plc rose 2.2% after reporting an 18% jump in third-quarter revenue, boosted by higher demand for its accessories and veterinary services as more people adopted pets during lockdowns.

(Reporting by Shivani Kumaresan in Bengaluru; editing by Uttaresh.V and Mark Potter)

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Wall Street bounce, upbeat earnings lift European stocks

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Wall Street bounce, upbeat earnings lift European stocks 4

By Amal S and Sruthi Shankar

(Reuters) – European stocks rose on Wednesday after Dutch chip equipment maker ASML and Swiss luxury group Richemont gave encouraging earnings updates, while investors hoped for a large U.S. stimulus plan as Joe Biden was sworn in as president.

The pan-European STOXX 600 index closed 0.7% higher, getting an extra boost as Wall Street marked record highs.

All eyes were on Biden’s inauguration as the 46th U.S. President, with traders betting on a bigger pandemic relief plan and higher infrastructure spending under the new administration to boost the pandemic-stricken economy.

Tech stocks rallied to a two-decade peak in Europe after ASML Holding NV rose 3.0% to all-time highs on better-than-expected quarterly sales and a strong order intake for 2021.

Meanwhile, Richemont rose 2.8%, after posting a 5% increase in quarterly sales as Chinese splashed out on Cartier, its flagship jewellery brand.

Britain’s Burberry jumped 3.9% after it stuck to its full-year goals, saying higher full-price sales would boost annual margins, while Asian demand remained strong.

The pair boosted European luxury goods makers that are heavily reliant on China, with LVMH and Kering gaining between 1% and 3%.

“Any sign that retail spending is picking up in China is going to be a boost to the Western markets and those heavily exposed to it,” said Connor Campbell, financial analyst at SpreadEx.

The European Central Bank is set to meet on Thursday. While no policy changes are expected, the bank could face more questions about an increasingly challenging outlook only a month after it unleashed fresh stimulus to bolster the euro zone economy.

“With the new round of easing measures fully in place and no new forecasts to be presented tomorrow, it should be a fairly uneventful day for the euro,” ING analysts said in a note.

Italy’s FTSE MIB gained 0.9% and lenders rose 1.6% after Prime Minister Giuseppe Conte won a confidence vote in the upper house Senate and averted a government collapse.

Conte narrowly secured the vote on Tuesday, allowing him to remain in office after a junior partner quit his coalition last week in the midst of the COVID-19 pandemic.

Daimler AG jumped 4.2% after its Mercedes-Benz brand unveiled a new electric compact SUV, the EQA, as part of plans to take on rival Tesla Inc.

Germany’s Hugo Boss added 4.4% after Mike Ashley-led Frasers said it boosted its stake in the company.

(Reporting by Sruthi Shankar and Amal S in Bengaluru; Editing by Shailesh Kuber and Arun Koyyur and Kirsten Donovan)

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