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JAPAN TAKES ANOTHER TURN FOR THE WORST, YEN BUOYED BY RISK-AVERSION

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By Arnaud Masset, market analyst, Swissquote Bank

  • Deterioration of Japanese market sentiment continues to worry against the backdrop of the current state of the Japanese economy despite massive stimulus
  • The recent appreciation of the yen is to be attributed to the global increased risk-off sentiment and does not reflect any improvement in the economy, therefore we feel weakness will continue and that the BoJ will keep on reacting accordingly
  • We are bearish USD/JPY which sounds ironic but we believe that the greenback is overvalued, On the upside, the closest resistance lies at 113.80
  • Data from China surprised slightly to the upside, suggesting that the PBoC’s stimulus has finally started to show some results, although this good news should be viewed cautiously due to the strong seasonality effect of Chinese New Year holiday in early February
  • USD/CHF may consolidate at around 0.96, the bias is on the downside as the pair broke its 40-week moving average, as well as the bottom line of its uptrend channel, which it has held since August last year
  • Concerning fundamentals, the Fed’s rate rise delay, and the high level of uncertainty in global financial markets should continue to weigh on the greenback
  • EUR/USD treaded water throughout the entire Asian session, moving between 1.1367 and 1.1390

Safe haven assets were broadly in demand on Friday, while stocks and riskier assets struggled to find buyers ahead of today’s much awaited NFP report. Data from China surprised slightly to the upside, suggesting that the PBoC’s stimulus has finally started to show some results. The official manufacturing PMI passed the 50 mark that separates growth from contraction, printing at 50.2 in March from 49 in February (also beating median forecast of 49.4). Similarly, the non-manufacturing PMI rose to 53.8 from 52.7 in the previous month. However, this good news should be viewed cautiously due to the strong seasonality effect of the Chinese New Year holiday in early February. Finally, the private Caixin manufacturing PMI printed at 49.7, beating consensus of 48.3 and the previous month’s reading of 48. The People’s Bank of China set the dollar/yuan fixing lower for the fourth straight day, down to 6.4585, the lowest level since mid-December last year.

The Japanese yen remained broadly in demand in Tokyo as investors fled riskier assets. USD/JPY fell 0.30% to 112.20, after testing the 112 threshold. The one-week 25-delta risk reversal in USD/JPY continued to improve, reaching -0.70, which indicates that market participants are seeking less downside protection. It also shows that the market does not anticipate further yen appreciation. On the upside, the closest resistance lies at 113.80 (high from March 29th), while on the downside a support can be found at around 112 (psychological level and previous low).

Yann Quelenn, market analyst: “Japan has clearly taken another turn for the worst. The first quarter Tankan report released last night showed a continued drop in market sentiment compared with three months ago. Large manufacturing index has declined below expectations which can certainly be attributed to the overall weaker demand and the current merging markets slowdown. The state of the Japanese economy despite massive stimulus continues to worry. The recent appreciation of the yen can be attributed to the global increased risk-off sentiment and does not reflect any improvement in the economy. We consider that the adoption of negative rates and the limitless stimulus have only managed to keep the Japanese economy afloat.

Yet, weakness continues and the BoJ is expected to carry on with their reactive stance. Financial markets have increased the likelihood of further easing at the next monetary policy meeting at the end of April. However, from our standpoint the BoJ has gone too far to back off even if its inefficient strategy has been clearly exposed. Inflation remains stuck at zero and we do not spot any ongoing momentum that would suggest a further increase. Currency-wise, we are bearish USDJPY which sounds ironic but we believe that the greenback is overvalued.” —

USD/CHF almost completely reversed gains from yesterday and consolidated at around 0.96. From a technical standpoint, the bias is on the downside as the pair broke its 40-week moving average, as well as the bottom line of its uptrend channel – which it has held since August last year. Concerning fundamentals, the delay of the Federal Reserve’s next rate, and the high level of uncertainty in global financial markets should continue to weigh on the greenback. EUR/USD treaded water throughout the entire Asian session, moving between 1.1367 and 1.1390.

In the equity market, Asian regional markets were trading in negative territory across the board. Japanese shares took the biggest hit with the Nikkei and Topix indices down 3.55% and 3.40% respectively. In Hong Kong the Hang Seng slipped 1.02%, while in Singapore the STI was off 0.71%. In mainland China, equity returns were mixed with the Shanghai Composite moving back and forth between positive and negative territory, while the slump in tech shares dragged the Shenzhen Composite lower by 0.55%. In Europe, equity futures are no exception as all the indices are blinking red across the screen, pointing to a lower open. US futures are also trading lower.

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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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