7 Reasons Why the Housing Boom Will Continue to Accelerate in 2021

The US residential real estate market is on fire. Demand is surging as everyone is stuck at home, using their house as a gym or an office and of course a place to live. A recent Harris Poll showed that nearly 40% of urbanites were considering leaving the city to find a less crowded place to live, that featured a house. New and existing home sales are hitting multi-year highs and this trend will continue as interest rates are expected to remain near historic lows. The combination of ultra-low inventories as well as rising demand has buoyed the IYR real estate ETF along with other home building stocks. This momentum is poised to continue. Here are 7-reasons why the housing boom will accelerate in 2021.

1)  COVID-19 is Driving Up the Divorce Rate

The spread of COVID-19 is not going away. Nearly everyone is stuck at home with each other which is increasing separations and divorces at a higher than normal rate. For the period between March and June 2020, the number of people in the U.S. looking for divorces increased by a robust 34% year over year according to Legal Templates. The driving force, the lockdown during the spread of COVID. To me, this means that more people will be looking to find a new home especially if kids are involved.

2) People are Leaving the Cities

People are fleeing cities at record rates. The pandemic is driving people to less populated areas, away from apartment dwelling, and toward houses. The New York Times reported that from March through August the number of people moving out of large cities was up 50% year over year. HireAHelper, an online marketplace, found that the spread of COVID has generated an abnormally large increase in the people moving out of large cities like New York, Los Angeles, and San Francisco and into smaller cities like Scottsdale Arizona, Durham North Carolina, and Columbus Ohio. This trend is perpetuating and I believe it will continue through 2021.

3) The Trend in New Home Sales is Rising

It’s easy to say that since divorces are up and people are leaving cities that new home sales should rise but it is another to prove it. The proof is always in the pudding. In August, sales of new U.S. single-family homes surged to their highest level in nearly 14 years according to the U.S. Commerce Department. New home sales rose 4.8% to an annual rate of 1.011 million units which was the highest level since September 2006. Since new home sales are counted at the signing of a contract, I consider these metrics a leading indicator of home sales.

4) Existing Home Sales are Accelerating

New home sales make up about 15% of the total home sales in the US compared to existing home sales which make up the bulk of home sales. In August, existing-home sales rose by 2.4% month over month to an annual rate of 6 million units the highest level since December 2006. Sales surged nearly 11% year over year. The accelerating rate of sales has spilled over into prices. The Commerce Department reports that the median existing house price jumped 11.4% year over year to a record $310,600 in August.

5) Inventories Remain Very Low

Homebuilders are salivating at the prospect of lower trending inventories. There were nearly 1.5-million homes on the market in August, down 18.6% from a year ago. At this rate, it will only take 3-months to clear out all the current existing home inventory down from 4-months a year ago. Historically, a 7-month supply of homes is viewed as a healthy equilibrium. Homes are flying off the market. In August the average home was on the market for 22-days, compared to 31-days a year ago, according to the National Association of Realtors. Nearly 70% of the homes on the market sold in less than 1-month.

6) Interest Rates are at Historic Lows

While the tightness in the housing market could generate some demand destruction attractive borrowing rates have more than offset the higher prices. In September, the 30-year fixed mortgage rate hovered near 2.87%, according to Freddie Mac. These rates will likely remain stable as the Federal Reserve has signaled to market participants that short-term interest rates will remain near zero, for the next 3-years.

*Source Y-charts

7) The Technicals are Positive But Be Prepared Either Way

The IYR real estate ETF is consolidating sideways. When the price of an ETF moves sideways for several months it means it is building up a lot of energy for the next move. The recent movements have created a tighter range as the ETF is sandwiched between resistance near the 10-week moving average and support near the 50-week moving average. Any breakout here will generate a robust move higher, potentially testing the 2020 highs near $101. Strong resistance is seen near the August 2016 highs which coincide with the June 2020 highs near $87.

Short-term momentum is positive as the fast stochastic recently generated a crossover buy signal. Medium-term momentum is decelerating as the MACD (moving average convergence divergence) histogram is printing in positive territory with a flattening trajectory which points to consolidation.

The Bottom Line

The upshot is that the spread of COVID has brought on a cascade of events that point to a continued acceleration in the housing market. People are moving out of large cities and looking for homes in the suburbs and smaller cities. The divorce rate has accelerated which means that more people will be competing for available homes. Both new and existing home sales have reached 14-year highs, and the low level of interest rates will continue to propel demand. With inventories as multi-decade lows, home builders will continue to benefit from higher demand and low supplies. The technicals show the IYR ETF is moving sideways gathering energy and poised to break out to higher levels.

As a technical analyst and trader since 1997, I have been through a few bull/bear market cycles in stocks and commodities. I believe I have a good pulse on the market and timing key turning points for investing and short-term swing traders.

Chris Vermeulen
Chief Market Strategist

NOTICE AND DISCLAIMER: Our free research does not constitute a trade recommendation or solicitation for our readers to take any action regarding this research.  It is provided for educational purposes only to our subscribers and not intended to be acted upon.

Second Phase Real Estate Collapse Pending, Part II

In this second part of our research into what we believe is the US pending real estate collapse, we’ll explore more data supporting our expectations.  In the first part of this article, we highlighted the Case-Shiller data showing home price levels had already exceeded 2006-07 levels and how earning levels have collapsed after the COVID-19 virus event.  Our research team believes thee extremely high price levels, combined with the uncertainty of future earnings, unemployment, layoffs, and other economic contractions will result in a late 2020 or early 2021 shift in the residential real estate market.

We already know that commercial real estate has experienced one of the worst declines in decades.  Delinquencies have skyrocketed and thousands of US businesses have entered bankruptcies.  Main street and consumer services sectors will likely continue to feel the pain related to the post-COVID-19 economy for many months still.  The question before all investors should be “how will the price levels reflect the changes in earning and economic data throughout this transition?”

Our research team believes the contraction in earnings for the consumers as well as the extended unemployment levels will present a very real potential for future foreclosures and delinquencies in the residential real estate market.  We believe this process will begin to become noticeable approximately 6+ months after the COVID-19 shutdowns started – sometime near August or September 2020.  Once the destruction of earning levels properly reflects into the economic cycles and banks tighten lending opportunities, the scale of capable buyers will shrink at a time when home inventories may begin to skyrocket – very similar to the 2008-09 credit crisis.

Ever since the lower interest rates pushed mortgage levels below 3%, residential home sales have been booming.  This is likely because people in cities are wanting to move out of the city and into the suburbs for a healthier and less compacted lifestyle.  Additionally, many of these more rural areas present better home price levels and more value for people selling urban real estate.

Another aspect of this boom in rural home sales is that people wanted to escape the trap of the city and move to locations where they have more room and more ability to “live off the property instead of living off the supermarket or local outlets.  This process of urban escape could take many months or possibly years for qualified sellers to relocate out into the more rural areas.  The point being that urban real estate values may dramatically decline as a result of the mass exodus from the cities that are currently taking place.

US manufacturing continues to decline year over year which indicates that manufacturing jobs and output is far from recovering.  If we attempt to read between the lines, it suggests that one of the most important aspects of any economic recovery is still showing -10% year over year contraction.  This suggests a longer recovery process for manufacturing output and jobs.

(Source: https://www.investing.com )

US retail sales have also collapsed over the past 3+ months.  Although one could argue that e-commerce sales have made up for these losses, one has to understand that retail sales within the US employs a host of other people that support local and regional stores.  Sales clerks, managers, warehouse, delivery and shipping and other positions that would normally be associated with retail or retail services have contracted by as much as 10 to 15% (or more) over the past 3+ months.

Additionally, consumer activity, which includes retail sales and retail services, makes up more than 80% of the US GDP levels.  If manufacturing and retail/consumer activity levels have dropped by 10% to 15% or more over the past 3+ months and will continue a slow recovery process lasting many months, we believe the eventual shift and contraction in the real estate market could present a lasting collapse in prices for many urban and outlying areas.

(Source: https://www.investing.com )

Our researchers believe the Real Estate ETFs may experience a 20% to 40% decline over the next 3+ months as the reality of the urban exodus hits.  Cities like Miami, Los Angeles, Chicago, San Francisco, and dozens of others may see a dramatic decrease in demand as buyers focus on more rural areas and the new “work from home” environment.  We’re already seen some evidence from discussions with local real estate professionals that a shift in buying interests is taking place.  Now, we are watching the middle and upper scale real estate markets in urban areas to confirm our hypothesis.

Once we start to see price decreases in larger urban areas (like Los Angeles, New York, Miami, and other areas), particularly in the condo and apartment sectors, we’ll know the shift in buying is taking place.  We believe condos and apartments will be one of the first sectors hit as well as middle and upper scale real estate.  We are also watching the foreclosure and auction data to determine if and when new waves of defaults start to hit the marketplace.

After stating what we believe to be a factual interpretation of the current real estate marketplace and the transition that is taking place, we believe the real shock will come to some of the hottest urban markets in the US and abroad.  We believe areas like Miami, New York, Los Angeles, Seattle, Portland, and others will experience a sudden lack of demand which will translate into decreasing price levels and sales activity.  The COVID-19 virus event has suddenly prompted people to realize the urban lifestyle if fraught with some risks that are partially negated in a rural environment and away from the packed and busy cities.

If our research is correct, there is a very real opportunity for skilled technical traders to take advantage of the next downside price wave in IYR and REM.  We believe a 20% to 40% price contraction will take place over the next 3+ months prompting a new momentum base to set up near November or December of 2020.  This base level may become a temporary base level as we find out how the COVID-19 virus is affecting the US economy and how quickly or aggressively people are exiting the urban environment.  Overall, we believe this is an excellent opportunity for skilled technical traders to profit from a new downside price wave.

IYR may target $65 to $68 before finding any real support.  Extended downside selling may push IYR to levels near $55 to $60 over the next 6+ months.

REM price levels may collapse to $13 to $15 over the next 4+ months as we believe the shift towards selling the urban areas and the tightening bank standards may result in a more constricted buying phase.  Inventory in rural areas is limited – very limited.  This may prompt a wave of current sellers to attempt to “get out now” and then wait for/hunt for the best rural opportunities.

Attempting to read this shifting market is like trying to predict the weather 3 months out.  There are many various aspects of the real estate market that could subtly change how the market dynamics shift.  The one thing we are certain of at this point is that the COVID-19 virus as well as the social and political turmoil will not end until sometime after November/December 2020.  Therefore, we are certain to have another 6+ months of shifting markets which may peak shortly after the US Presidential election (although we doubt it).

We strongly believe the remainder of 2020 and most of 2021 may continue to prove very challenging for homeowners and people attempting to make transitions away from urban areas.  We are alerting you to these opportunities because we believe a very good opportunity exists in these trades and we believe the real estate market will continue to be one of the biggest transitional price rotations we’ve seen in the past 8+ years.  Trillions of dollars reside in both the residential and commercial real estate marketplaces and we believe a huge shift in these markets is about to unload on consumers/banks.

This could be one very big component of a fantastic trading opportunity for skilled technical traders.

Get our Active ETF Swing Trade Signals or if you have any type of retirement account and are looking for signals when to own equities, bonds, or cash, be sure to become a member of my Passive Long-Term ETF Investing Signals which we are about to issue a new signal for subscribers.

For a look at all of today’s economic events, check out our economic calendar.

 

Chris Vermeulen
Chief Market Strategies
Founder of Technical Traders Ltd.

NOTICE: Our free research does not constitute a trade recommendation or solicitation for our readers to take any action regarding this research.  It is provided for educational purposes only.  Our research team produces these research articles to share information with our followers/readers in an effort to try to keep you well informed.

 

Second Phase Real Estate Collapse Pending

Real estate, especially commercial real estate, is likely to be the first segment of the real estate market to enter the second phase of an extended collapse.  The COVID-19 virus has created an atmosphere where continuing operations for retail, restaurants, and many other business segments is virtually impossible to maintain.  Without the ability to earn sufficient income, thousands of restaurants and other retail businesses have already closed or are in the process of closing.  This has pushed the commercial real estate market into turmoil.  We believe the residential real estate market will follow the commercial market because consumers are going to suffer as commercial real estate collapses.  Consumers are an essential part of the consumer marketplace.  Thus, the collapse in the commercial market means the consumer market will contract because of the lack of earning and hiring associated with a healthy commercial market.

We’ve authored numerous articles over the past 4+ months related to the real estate market and how our research team believes the COVID-19 virus event will process multiple stages of a contraction in the US markets.  First, the shock of the virus event will take place.  Next, the realization of the economic damage related to the COVID-19 event will take place.  By this time, the second phase markets should have already entered a stalled market phase.

May 17, 2020: REAL ESTATE SHOWING SIGNS OF COLLATERAL DAMAGE- PART II

April 23, 2020: REAL ESTATE CRASH THE NEXT SHOE TO DROP – PART III

The reality of the real estate market over the next 24+ months is that demand will center around earning capabilities and qualification eligibility.  As consumers recoil from the COVID-19 virus event and the economy restructures with new expectations, we believe the real estate market will transition from a low rate opportunity to a low-income selling phase – where fewer consumers are able to afford high priced real estate markets.

The transition in the real estate market will likely take place as the market shifts into a contraction phase 6 to 10+ months after the February/March 2020 Covid-19 virus event.  We believe the transitional phase of the real estate market will require a period of time allowing the opportunistic low rate buyers to push price levels to a peak before the lack of work/earnings starts to change the market dynamics.  Once the lack of real earnings takes place, the real estate marketplace will quickly shift into decreasing price levels and slower demand levels.

These following Case Shiller Home Index charts clearly illustrate that some of the most depressed and dynamic markets across the US have experienced price level increases that represent very over-extended home valuation levels.  Overall, the US Home Price Index is more than 35% higher than the 2006 peak level.  The Detroit Michigan Home Price index has recently broken the 2006 peak price level and the Dallas Texas Home Price Index is more than 75% higher than the 2006 peak level.  Thus suggests that certain marketplaces have already experienced a dramatic price increase that may not be sustainable after the COVID-19 virus event.

Case Shiller US Home Price Index

Case Shiller Detroit Michigan Home Price Index

Case Shiller Dallas Texas Home Price Index

The Case-Shiller US home price index data suggests the US housing market has started to flatten out nearly 35%+ above the 2007-08 highs.  We believe the past 8+ years of recovery after the 2008-09 credit crisis has promoted an inflated real estate market across much of the US.  Even areas that were once quite moderate in terms of price inflation have now seen big increases in home price levels.

Recently, a Zerohedge article reported real-time US economic statistics that suggest a much deeper second phase economic contraction is likely to take place.  Our research team has been suggesting this outcome for many months now.

July 13, 2020: US Recovery Stalls As Pandemic ‘Second Wave’ Threatens To Unleash Double-Dip Recession

Current real estate data from Realtor.Com suggests listing prices have surged over the past 30+ days as inventory levels have decreased dramatically and “days on market” have increased by as much as 25%.  The Realtor.com recovery Index is reporting a value of 97.80 for July 4, 2020 – down 2.2% from the basis level on February 1, 2020.  The lower interest rates over the past 90+ days have prompted a refinance/purchase phase from consumers that were not at risk from the COVID-19 shutdowns.  But as earning capabilities contract, we believe the initial phase of purchasing and refinancing will abate and transition into a more desperate mode of forced selling.  Without income/earnings, consumers won’t be able to afford to purchase/maintain mortgages.  Everything hinges on the ability for consumers to earn wages that support a healthy housing market.

The newest Real Earnings data (-2.2%) represented the biggest earnings decline level over the past 12+ years.  Even during the 2007-09 credit market crisis, the earnings level never fell below -1.0%.  We believe this new earning data level may be the start of even worse levels to come.

US Real Earnings MoM

(Source: https://www.investing.com)

As more data is presented, we’ll be able to better estimate future expectations related to many levels of economic activity.  What we do know from experience is that consumers drive more than 80% of the economy in most cases.  If the consumer is unable to earn income at levels similar to levels prior to the COVID-19 event, then certain segments of the economy will contract – almost like clockwork.  Initially, as the COVID-19 virus event started, many employers attempted to navigate through the initial expectations of the shutdowns – expecting some type of moderate recovery fairly quickly.  As the COVID-19 virus event continues, expectations change and we believe more and more consumers will be pushed into unemployment and experience decreased levels of income for longer periods of time.

By the end of 2020, we should know how the real estate market is functioning, and if price levels are stable or not.  Our researchers believe a “1-2-3” type of economic collapse is just starting.  Consumers lose income while commerce and retail collapse.  Renewed state and local shutdowns, similar to the new California shutdown, will continue to disrupt the recovery process and disrupt workers and earnings.  Credit tightening will also contract the activity of the real estate market.  Overall, these factors should lead to a declining price level in late 2020 and into early 2021.

We’ll go over more data in Part II of this article as we wait for more data to confirm our research hypothesis.

Get our Active ETF Swing Trade Signals or if you have any type of retirement account and are looking for signals when to own equities, bonds, or cash, be sure to become a member of my Passive Long-Term ETF Investing Signals which we are about to issue a new signal for subscribers.

For a look at all of today’s economic events, check out our economic calendar.

 

Chris Vermeulen
Chief Market Strategies
Founder of Technical Traders Ltd.

NOTICE: Our free research does not constitute a trade recommendation or solicitation for our readers to take any action regarding this research.  It is provided for educational purposes only.  Our research team produces these research articles to share information with our followers/readers in an effort to try to keep you well informed.

S&P 500 to Hit 3400 By End-2020 and 3600 Next Year; Earnings to Rebound in 2021: Mizuho

The COVID-19 related collapse in earnings will be reversed slowly as the economy re-opens and the recovery matures into expansion in 2021, causing a full recovery in the market to the February highs by the end of this year, according to Mizuho Securities’ chief economist Steve Ricchiuto.

Since nearly all the country’s economic activity has been suspended since late March amid rising concerns about the spread of the coronavirus disease, federal governments and central banks around the world has spent trillions of dollars trying to help restart the economy and provide some relief to the financial markets.

That stimulus has given the initial impetus to stock as liquidity increased in the debt markets and volatility subdued in several markets. However, the long-term impact of these massive stimuli on the economy and the financial markets is unknown. The S&P 500 has recovered more than 40% from March’s trough, closing 1% up at 3185.04 on Friday.

Based on the average change in earnings growth due to companies reporting positive earnings surprises, it is likely the index will still report a year-over-decline in earnings of more than 40% for Q2, according to FACTSET.

“Bottoms-up estimates suggest operating earnings will be down between 41% and 42% in the second quarter after having declined just 1% in the first quarter of the year. The COVID-19 related collapse in earnings is expected to be reversed slowly as the economy re-opens and the recovery matures into expansion in 2021,” said Steve Ricchiuto, Chief Economist at Mizuho Securities.

“Operating earnings are not expected to be back in the black, +1.5%, until the first quarter of next year. Earnings growth in the third quarter is expected to be down almost 23%, followed by a 10% year-over-year decline in the final three months of 2020. For the full year 2021, earnings are expected to bounce by 28.9% after a 22% decline in 2020.”

Earnings are forecast to total $127.28 billion in 2020, down from $157.68 billion seen last year, and are anticipated to recover to $162.39 billion next year. Mizuho forecasts the multiple to decline from 24.8x to 22.1x in 2021 as investors slowly realize the increased level of debt created by the COVID-19 lockdown, leading to a shallow 2%-2.5% expansion.

Several equity analysts advise keeping a close eye on companies whose stock prices have fallen substantially along with others in the wake of the coronavirus pandemic, yet whose underlying fundamentals remain strong and are expected to strengthen.

“These bottoms-up earnings estimates and our assessment of the nature of the recovery has caused us to revise upwards our year-end target for the broad market index from 3200 to 3400. Essentially, we now expect a full recovery in the market to the February highs, not just to 2019 year-end close. In 2021, we are calling for a 6% rise in the S&P 500 to 3600 based on our shallow expansion call. Our relatively cautious expansion forecast is based on the fact that although a credit dislocation did not push the economy into recession, the need to repair balance sheets will likely sidetrack investment spending,” Mizuho’s Ricchiuto said.

“A fiscal policy push into industrial policies and/or infrastructure spending could cause us to reconsider this macro forecast but, with the U.S. election and congressional summer recess rapidly approaching, the window is rapidly closing for a phase IV stimulus bill to be negotiated and passed. The uncertainty created by the rise in COVID-19 cases being reported is likely to keep the market trading within a 3000 – 3200 range for the next several weeks,” he added.

Quarantine Softening: Light at the End of the Tunnel, But not Yet a Way Out

These announcements, as well as the easing measures in Germany, Italy and China before that, are a kind of A light at the end of the tunnel but not yet a way out.

This ray of hope has allowed markets to put aside for a while the fears of an economic collapse, which emerged after the published macroeconomic data in recent days.

The number of jobless claims last week in the United States amounted to 5.25 million. Twenty-two million of such claims were recorded during the four weeks, and this is a 23x increase compared to the previous four weeks (930K) that was the norm for over the last three years.

The continuing jobless claims data is lagging for one week. However, already now, at 12 million, this figure is almost twice as high as the highest levels in 2009, when it reached 6.4 million. The number of employed in the U.S. is just over 150 million, so the current losses already exceed 10% of all jobs.

At the same time, the shocking collapse of China’s GDP in the first quarter cannot be ignored. The second-largest economy lost 9.8% in the first three months of the year and 6.8% below the level one year ago. It was only in the 1960s that China experienced a more dramatic downturn as its relationship with the Soviet Union was severed.

Optimists now have one hope that the unfreezing of the economy will not lead to long-term job losses. These expectations are based on China’s example, where 100% of large companies and about 80% of small companies have already returned to work after the lockdown. Industrial production in China was down 8.4% y/y in March, and that’s great news! A month earlier, the decline was over 13.5%, and was expected a 10% drop.

The bad news is still weak China retail sales in March. They declined by 15.8% y/y, in sharp contrast to the average growth rate around 8% y/y until February. The bad news that for developed countries, such a downturn promises a much higher pressure for the GDP. An 8.7% decline in U.S. sales in March could only be the beginning of a much more profound fall in April and a long recovery in the coming months.

 by Alex Kuptsikevich, the FxPro senior market analyst

Covid-19 in Italy: What is the Budget Deficit, Sovereign Debt and Credit Rating Outlook?

Dennis Shen, a Director in sovereign ratings at Scope Ratings, answers five pressing questions that policymakers and investors are asking amid worries about the country’s credit ratings (BBB+/Stable):

Italy is at the centre of Europe’s health care and economic crisis. Should the government in Rome be worrying more about growth or about the budget deficit to protect the country’s credit ratings?

The strength of the economic recovery and expectations for deficit levels in 2020 and in years beyond will both ultimately be critical in determining our long-term sovereign ratings. In the near term, the speed and shape of a future economic recovery will be more important for policy makers and financial markets than the level of the deficit.

The priority right now is rightfully on stemming this unprecedented public health crisis that has cost over 10,000 lives in Italy, protecting households and businesses, and then getting the wheels of the economy rolling again before a deeper financial crisis manifests itself.

Italy’s high public debt levels have been a consistent area of concern for investors, alongside tensions in recent years between Rome and Brussels and breaches of EU fiscal rules.

For now, however, we see no risk of those fears materialising into an EU Excessive Deficit Procedure immediately nor do we see an outsized increase in yields on Italian government bonds (of the scale of that at sovereign debt crisis heights).

First, the EU has suspended its budgetary rules as Europe grapples with the pandemic. Secondly, European institutions such as the ECB and European Stability Mechanism are coming to Italy’s aid with hefty monetary and contingent fiscal support for euro area member states.

What are Scope’s latest GDP, budget-deficit and debt-to-GDP forecasts for Italy?

The reality is that Italy faces a very steep economic contraction of 5% to 10% this year, with risk even as regards this range skewed to the downside. Moreover, a much wider deficit will be a result of the economic decline and emergency fiscal responses to the pandemic, together pushing public debt well above the 135% of GDP level at which it stood at end-2019.

We expect a budget deficit of over 6% of GDP this year, widening after Italy’s budget result was better than anticipated in 2019 at only -1.6% of GDP. The much increased 2020 deficit accounts for an increase in Italy’s cyclical deficit alongside well over EUR 50bn in “shock therapy” fiscal support actions that alone raise the deficit by over 2% of GDP. Italy’s debt ratio could easily breach a 145% of GDP threshold within the next year.

What about the longer-term fiscal and economic consequences of a severe recession this year?

We recognise that “cyclical” deterioration in growth or “cyclical” weakening in budgets during a crisis have sometimes more structural consequences than one thinks: the weakening of Italian companies, banks and government balance sheets over 2020 could reduce investment even in 2021 or 2022, and higher “extraordinary”, one-off deficits may not be so completely unwound in 2021 or even by 2022.

The severity of this economic shock, the durability and strength of the recovery after it as well as greater fiscal imbalances do matter as they have effects on investor confidence and the longer-run risk of liquidity crises.

Should Italy instead be adopting a “whatever it takes” fiscal approach in view of its budgetary constraints?

In today’s exceptional circumstances, a “whatever it takes” approach is what is required on the part of national governments and central banks to address the pandemic and its economic consequences. But there is no escaping the observation that there are immediate and later-day credit implications depending on the scale of the decline in the economy and in debt sustainability.

Authorities ought to direct targeted policies such as to minimise the build-up of longer-run fiscal and economic imbalances. At the same time, the more that other euro area countries with greater fiscal space, such as Germany, can do to bolster their economies, the more there will be positive knock-on benefits for Italy – and the less Italy needs to do alone.

In what circumstances might Italy’s sovereign rating be downgraded?

Scope’s next scheduled sovereign review date on Italy’s credit ratings is on 15 May 2020. There has undoubtedly been a weakening of public- and private-sector balance sheets from this unprecedented economic shock. One consequence of a weakened balance sheet is that the private sector and the central government are now more vulnerable to shocks in the future, even assuming a gradual recovery does take place later in the second quarter and into the third.

In other words, Italy’s fundamentals will look different after this crisis than they looked entering it. But the crisis has also demonstrated one core rationale underpinning Scope’s investment-grade rating for Italy compared to a more pessimistic view of market participants: Italy’s systemic importance in the euro area and the extraordinary support from European institutions available to Italy under worst-case scenarios.

The ECB has provided ample evidence of European institutions’ extraordinary support for Italy over recent weeks: new long-term refinancing operations, more accommodative targeted long-term refinancing operations and a tolerance for front-loading new quantitative-easing purchases to potentially support vulnerable governments like Italy’s – more or less a backdoor activation of Outright Monetary Transactions – alongside considerations of ESM credit lines under curtailed conditionality.

The major question now will be whether the fundamental deterioration that has occurred and is still ongoing, acknowledging the extraordinary support and Italy’s multiple other credit strengths, is still reflected in a BBB+ credit rating or if an alternative assignment is warranted.

Dennis Shen is a Director in Public Finance at Scope Ratings GmbH.

Italy’s Economy Proves Extremely Vulnerable to Coronavirus Epidemic

Governments around the world are in a quandary over Covid-19: how to counter the economic disruption caused by the outbreak when public-health measures to contain the disease require often severe restrictions on people’s ability to travel and work.

Italy has reported the largest number of cases of coronavirus in Europe, standing at more than 9,100 now, with at least 463 deaths to date, leading the government to take drastic measures to slow the spread of the disease. Schools closed on 5 March for a minimum 10 days and sporting matches will be played behind closed doors for the next month, if they haven’t already been cancelled. The authorities have expanded a quarantine to all of Italy, restricting public gatherings and encouraging “social distancing”.

The public health challenge the Italian government faces is very serious. But on top of the disruption to millions of ordinary people’s lives and the distress for those worst affected, the Italian economy is experiencing a triple shock.

Export Sector Risks

First, Italy’s export-oriented industry is relatively heavily exposed to the disruption to global supply chains caused by the initial outbreak of the disease in China. As Europe’s most-important manufacturing powerhouse after Germany, Italy is the EU’s third biggest exporter of goods to China and third biggest importer from China after Germany and France.

The particularly virulent outbreak of the disease in Italy is taking place in the country’s northern industrial heartland. The region of Lombardy alone counts for around 27% of exports and 22% of Italy’s GDP, with the total share of the economy attributed to severely impacted regions rising to 40% once Veneto and Emilia-Romagna are included.

Significant Impact on Tourism Industry

Secondly, the impact on Italy’s treasured tourism sector is significant. The international spread of the virus is discouraging visitors to some of Europe’s most popular holiday destinations such as Milan, Venice and Florence. Tourism accounts for 13% of Italy’s economic output by itself. Even after the global and Italian manufacturing sectors start to recover, Italy’s tourism exports might well lag behind should travellers remain reluctant about voyaging too far from home.

Vulnerable Economy and Public Finances

Thirdly, the Italian economy and public finances were already in a vulnerable position in comparison with those of other European countries even before the coronavirus struck. GDP shrank in the fourth quarter. Public debt remains high. We expect gradually rising debt to GDP in the future. In addition, we undertook an exercise a month ago to stress test the public finances of EU countries. Italy scored weakly in terms of its fiscal vulnerability to a severe economic shock and capacity to weather such a crisis without significant increases in public debt.

Conclusion

Our conclusion is that Italy is facing a very difficult year as the epidemic has brought widespread disruption to many communities in addition to the distress they are suffering as the death toll has mounted. We estimate that the economy may shrink in 2020 by at least 0.3%; we had previously forecasted growth of 0.25%. The sometimes-shaky coalition government of Prime Minister Giuseppe Conte has limited room for fiscal manoeuvre to offset the economic shock absent endangering debt sustainability.

The government has opened up its fiscal first-aid kit amid the public health emergency to help businesses, workers and those on the front-line dealing with the health crisis. Measures include doubling a “shock therapy” fiscal stimulus package to EUR 7.5bn (0.4% of GDP) on 5 March, including tax credits for companies hardest hit, bolstering a national wage-supplement fund and extra cash for health services and the civil protection and security forces. There are now discussions about further raising the size of the stimulus.

Weaker-than-expected growth and extra-governmental spending suggest that Italy’s budget deficit will widen significantly this year, if only temporarily, after narrowing to 1.6% of GDP last year. The government recently estimated a deficit of 2.5% of GDP in 2020.

In normal times, that would put Rome at loggerheads with Brussels as Italy has repeatedly brushed up against EU fiscal limits. However, this time is different: in recognition of the gravity of the situation in Italy and in the rest of Europe, the European Commission has indicated maximum flexibility around its fiscal rules in 2020 if spending is clearly linked to the epidemic mitigation. Still, Rome’s approach needs to recognise the government’s budgetary constraints and still-elevated public debt of 135% of GDP at end-2019, second highest in the EU after Greece’s.

There are concerns that public debt may rise towards 140% of GDP in coming years, which could adversely impact on investor confidence particularly as a pronounced slowdown in global growth now appears definite this year. After all, an economic downturn can increase debt via multiple channels.

One is by curtailing tax revenue flows and raising counter-cyclical spending by governments, both driving budget balances downwards. Another is the reduction in nominal economic output, raising debt-to-GDP ratios via a denominator effect. Yet another is the possibility that the cost of servicing the debt rises as investors lose faith in governments with greater fiscal vulnerabilities.

One metric of investor concerns is the widening in the spread in yields between Italian and benchmark 10-year German government bonds to around 200 basis points, up from 130bps in mid-February. The last thing Italy needs presently is any deeper market sell-off and financial instability.

Even so, we recognise that Italy has significant institutional and financial strengths, among them a large and diversified economy, a long record of primary fiscal surpluses and moderate levels of non-financial private sector debt. Moreover, the government’s success in raising revenues supported the lower-than-anticipated budget deficit in 2019, which has given Rome greater leeway to release funds in responding to the crisis.

Crucially, Italy is a main beneficiary of the euro area’s ultra-accommodative monetary policy and lender-of-last-resort facilities. Italy can borrow over 10 years at very low rates still of just over 1%. Indeed, the BBB+ sovereign ratings we assign to Italy – itself 1-2 notches above the assessment from US credit rating agencies – reflects our unchanged view of Italy’s systemic importance within the euro area and associated likelihood of receiving multilateral support in worst-case scenarios.

Dennis Shen is a Director in Public Finance at Scope Ratings GmbH.

A Plague On The Market, Or a Buying Opportunity?

How Will The Coronavirus Affect The Stock Market

The virus, which originated in Wuhan, China, has already infected over 40,000 and threatens to completely shut-down the Chinese economy.

The closest comparison to today’s epidemic is the SARS outbreak in 2003. The Wuhan Coronavirus is spreading at a much faster rate and is more deadly with 40,000 infected and 908 casualties. By the end of the SARS epidemic, there were only about 8,100 infected with 774 casualties. To date, there are less than 600 deaths related to the coronavirus.

Sickness Is Opportunity, For The Stock Market Anyway

Looking at data going back to the AIDS epidemic of 1981 it appears that sickness is an opportunity, at least where the stock market is concerned. There have been a total of 12 major outbreaks in the time since, not counting the current one, and in most cases, the market moved higher in the weeks and months that followed.

The initial market reaction to the news of a new outbreak is often bearish but the sell-offs don’t last long. A full 75% of the instances tracked show a net decline in market price at the end of the first month but the number only declines from there. The ratio falls to 33% at the three-month mark and then 16% by the end of the first 12-month period. Out of the 12 incidents, the market only lost ground with two of them over the longer-term and even then the losses weren’t large.

The mini-Ebola outbreak of 2016 was the worst to hit the market over the short-term. It (allegedly) caused a -13% decline in stock prices in the first three months since detection but there is a caveat. This outbreak occurred coincident with an earnings recession and we all know that it is earnings that really drive stock prices.

The AIDS outbreak was the worst to hit the stock market over the long-term. Six months after the first reported case the market was down -0.20% and extended that to -10.75% by the end of the 12 months. The other outbreak to result in lower markets is the Measles/Rubella outbreak of 2014, that event had the market up after six months but down -0.73% after 12 months.

In all other instances, the market moved higher on both a six month and 12-month basis. The average gain after 6 months for all outbreaks is 9.02%, the average gain after 12 months is 13%.

If you are planning on making a trade based on this data your best bet is a bullish one but it’s still a gamble. A chart of the MSCI World Index prices with noteworthy outbreaks highlighted shows little to no correlation between global epidemics and stock market prices.

That Was Then, This Is Now

The risk for the market is that times have changed. For one thing, the global economy is more closely tied together than ever, for another, the coronavirus is bringing China to its knees. The rapid pace of spread has the country on lock-down. Travel restrictions are the least of the worry, entire workforces are quarantined and businesses are shuttering their doors.

We won’t know the true impact of the virus on global economic output and by extension corporate profits until the data begins to come in. We won’t know how long that impact will last or even when the virus is fully contained until the last infected person gets healthy and goes home. It could be months before then. With businesses like Disney and Tesla closing their China operations it is clear that their revenue and earnings exposed to China will take a hit and it could be a big one.

The Technical Outlook: The World Is Poised For A Fall

The technical outlook for the MSCI World Index isn’t great. In fact, between the daily and weekly charts, the index looks poised for a fall.

On the daily chart, the initial knee-jerk reaction is over, the first round of selling has passed, but the market is setting up for another fall. Now trading back at the previous high, the index is in danger of creating a double top at previous resistance.

Looking at the weekly charts, the MSCI World Index appears to have entered a consolidation that could take several weeks. The indicators are consistent with this, bullish but weakening, so sideways action within the new range should be expected. Resistance is near the 7,120 level and, since the index is trading near resistance, the next move will probably be lower. The first target for support is near 6,880, so long as it holds the longer-term outlook is bullish. If support fails the world market may be in for a major correction.

Don’t forget, earnings are what drive the market and the outlook for earnings is positive. The caveat is that the estimates for 2020 EPS growth have been on the decline and that is weighing on stock prices too. If the coronavirus emerges as a significant detractor to 2020 EPS growth I expect the world’s equities market will correct again and this time set a new, much deeper, low.

Yen – The Currency of Choice in Volatile October

The Trend is always a Trader’s Friend

USDJPYDollar Yen has been locked in a sideways action for most of the last three weeks between a top capped by the 50.0 Fibonacci and September high at 108.50 and a floor at 107.00. Wednesday’s move down below the 20-day moving average also breached the flat-lining 50-day moving average and was another attempt to test the 107.00 low. A breach of this level would test the 23.6 Fibonacci level and S2 at 106.00, the September low at 105.75 and the August low and key psychological 105.00. A breach and hold of 108.50 could then test the 200-day moving average at 109.00 and the 61.8 Fibonacci level. The Oscillators remain neutral but bias is to the downside in the higher timeframe weekly and monthly charts.

EURJPYThe Euro continues to be buffeted by continued weak economic data, the uncertainty that still swirls around Brexit and now the Trade War comes to Europe as the WTO backs the US and the imposition of tariffs on $7.5bn of goods it imports from the EU. The pair broke under the 20 SMA September 23, stalling at 118.00 and the 50.0 Fibonacci level before moving lower again yesterday to the 61.8 Fibonacci level. 117.00 represents the next support and the 116.00 September low. A significant reversal over 118.50 is required if the pair is to test 120.00 and the September high. The Oscillators remain negative and the bias is to the downside in the higher timeframe weekly and monthly charts.

GBPJPY – Sterling, as I have written many times in the last 40 months, remains firmly locked in the claws of Brexit fear, uncertainty and doubt and if it’s one thing that markets hate above all else it is FUD. GBPJPY the “widow-maker” moved below the 20 SMA and 50-day moving average September 27 stalling at 132.50 and the 38.2 Fibonacci level before moving lower again on Wednesday to test the S1 level at 131.50. Today the pair has recovered 132.50. 131.00 and the 50.0 Fibonacci level is the next support area, with the 61.8 Fibonacci at 130.00. The September low breached 127.00. A reversal over 133.50 is required if the pair is to test over 135.00 and the September high. The Oscillators are negative and the bias in the higher timeframes is mixed with the weekly chart positive and the monthly chart still negative.

AUDJPY – Action recently from the RBA has seen the Aussie depreciate significantly, with the AUDUSD posting a new more than 10-year low this week at 0.6670. AUDJPY, a proxy for China’s economic resilience and wider Asian economic performance, moved under the 20 SMA September 20, spending 6 days supported at 72.75 and the 38.2 Fibonacci level before moving lower on Tuesday under 72.00 to test the 61.8 Fibonacci at 71.67, below that is the floor of the recent consolidation zone at 70.75. The Oscillators remain negative and the bias in the higher timeframes is mixed with the weekly chart positive and the monthly chart still negative.

 

CAD, CHF & NZD Yen crosses also all remain below the key 20 SMA, having broken below on October 2, September 30 and September 19, respectively.

 

As Q419 completes its first week the Japanese Yen remains in demand as economic data continues to underwhelm, the “R” word (Recession) appears in the literature more frequently and the spectre of the inverted yield curve persists.

Stuart Cowell, Head Market Analyst at HotForex

(read our HotForex Review)

Sterling Remains Locked in The Political Headlights – Again

Brexit

Big political developments and big debate and big news noise erupted in the UK yesterday, but not a lot that would appear to have any bearing on how the unresolved Brexit process will unfold, although underscoring how divided and distracted the political system is. A lot is at stake, including the possible devolution of the United Kingdom, along with Brexit. Prime Minister Johnson accepted the Supreme Court’s ruling that his decision to suspend Parliament for five weeks was unlawful while stating that he disagrees with it, and politicizing it with a full-throttled hamming-up the people vs parliament narrative, roiling up the pro-Brexit base ahead of an upcoming election. The opposition is sticking with its tactical refrain from agreeing to an election or staging a confidence vote until the avoidance of no-deal Brexit on October 31 has been assured. If Johnson fails to secure a deal with the EU, the new law (the Benn bill) that will extend Brexit to January 31 will kick in on October 19. The opposition is in part concerned that calling an election before October 19 would leave room for Johnson to trigger a no-deal Brexit before the election has taken place, while they are also wanting to force Johnson to break his “do or die” promise to deliver Brexit by October 31, thinking this will cost him votes at the election.

Cable moved down over 1% yesterday and has moved another leg lower today within a pip or two of 1.2300. PM Johnson returned to a particularly vitriolic and acrimonious Parliament as the Brexit deadlock looks no nearer to a conclusion. When, how or even if the UK leaves the EU still remains unresolved, and as ever, uncertainty breeds fear and fear spikes confidence, sentiment, and the long-suffering pound. Cable remains rooted under 1.2400, triggering another move lower on the crossing EMA (H1) strategy at 07:00 GMT today, for a net gain of 27 pips.

The move lower yesterday took the pair down to the 20-day moving average and the 38.2 Fibonacci level around 1.2335. A breach of this level and 1.2200, the 61.8 Fibonacci level and the recent low below 1.2000 are next support areas. 1.2500 remains a key psychological line in the sand to the upside, beyond which is the recent September high at 1.2580 and the 200-day moving average at 1.2650.

With sterling down some 15% from the EU Referendum in June 2016, a potential significant upside move cannot be ruled out. The upside move will only come with some clarity in the Brexit process. The assumption, by many market participants, is that all sides want a deal and that the pain and disruption of a no-deal exit will cause both parties to compromise. So far there are little actual or practical signs of such compromise and the talking at least continues. The latest is that UK Brexit Secretary is to meet chief EU negotiator Barnier tomorrow in Brussels. Halloween is some 36 days away.

Most likely, Brexit will be delayed to January 31 and a general election staged in late November or December. The election will presumably be the final Brexit battle. One of four endgame scenarios will be produced by the election, depending who the victor is, or what possible inter-party alliances or coalitions prevails:

1. A no-deal Brexit on January 31 (which would be the fruit of a possible Conservative-Brexit party coalition).

2. Brexit with a deal and transition phase (the Conservative Party’s preference, though the party would have to win the election outright, which there is potential for, and reach an accord with the EU, which would be an uncertainty).

3. Brexit with a deal and multi-year transition period, but also subject to a “confirmatory” referendum (which is the position of Labour and SNP).

4. Brexit canceled (which is the position of the Liberal Democrats).

For the Pound, which has been the principal conduit of the financial market opinion of Brexit, outcome number 1 would be the most bearish scenario, while outcome 4 would be the most bullish.

Stuart Cowell, Head Market Analyst at HotForex

(read our HotForex Review)

Surprise Decision in the UK To Thwart a No-Deal Brexit Changed The Dynamics Of The Markets.

Our August 19th prediction of a market breakdown, as well as our continued research suggesting a breakdown in price was the most likely outcome, is a combination of technical analysis, predictive modeling and our understanding of the market dynamics at play throughout the world.  But, when news like this hits (global economic news, surprise news announcements or any type of positive or negative massive news event) the dynamics of the global markets can shift quite suddenly which we want to explain here. Before we get into the details, be sure to opt-in to my Free Market Forecast and Trade Ideas Newsletter so stay on top of these market moves.

With US earnings season setting up in September, headed into the holiday season throughout the globe, we believed the downside price move probability was far greater than the upside.  Then, out of almost nowhere, the No-Deal Brexit deal is sidetracked and the British Pound rallies dramatically on the news.

This Three-Hour British Pound Chart highlights the dramatic price reversal that took place late yesterday (after markets) and resulted in a news-driven price move that was unexpected.  The way these types of new events can come out of nowhere to dramatically alter price direction and trend is something that all traders have to deal with.  For a technical trader, these events, thankfully, don’t happen all that often.  But when they do happen, we have to readjust our understanding of the markets and dynamics that are taking place throughout the global financial environment and follow the money and potentially new trends against our current analysis.

With the news that the BREXIT is on hold right now and is being blocked by a certain segment in the UK Parliament, how will that result in new dynamics and opportunities for us to take advantage of and profit from? Obviously, currencies will continue to move until price levels settle near proper expectations – same thing with the global stock markets.  It is very likely that the US Indexes (ES, NQ, YM, and others) may attempt to move back towards recent highs if the fear and uncertainty of the BREXIT deal warranted that much pricing pressures in the markets?

Overall, when events like this happen, it is often the best decision not to try to chase them right away.  These are reactionary price moves related to news events – almost like a shock-wave which I explain this breakout on the chart is this video analysis.  They are here now, they move the market and they appear dramatic, but they are typically over as fast as they started.

This US Dollar chart highlights the downward price rotation that was likely prompted by the BREXIT news last night and may continue as the markets revalue “fear and uncertainty” over the next few days.  It is very likely that true price levels will be established over the next 7 to 10 days as the continued repositioning of assets results because of the change in BREXIT expectations from within the UK.

We need to stay dynamic in how we address these types of market moves and the risks that are persistent.  We can’t know what is going to happen in the governments and governing bodies of the world.  As technical traders, our job is to use our tools and resources to find the best opportunities and to take advantage of them when risks are manageable. We flip directions as the markets flip directions.  All we want the markets to move up or down because this provides opportunities for us to profit.

This Dow Jones Industrial Daily Chart highlights just how dramatic the upside move is today and how price is still below the recent highs set near 27,400.  Our August 19th Breakdown prediction is currently invalid based on this upside price move.  We did see a big move lower in early August, but we never saw the continued downside move that we expected.  The cycles were predicting this move would happen, but the global market dynamics (news and other items) have altered the current market perspective.  Must like QE events and other major global events, just because technical analysis or cycles suggest one thing will happen, if there is enough pressure from outside forces to move the markets one direction, then markets will typically relent to that pressure and move into the “path of least resistance”.  Right now, that path is upward.

CONCLUDING THOUGHTS:

We took a series of great profitable trades over the past 4+ weeks while the stock market traded sideways. This week we closed out three winning trades 3%, 6.5%, and 9.88% while most others lost money. As technical traders, our only objective is to protect our assets, find great trades, generate profits and avoid unwanted risks.  We are doing exactly that by managing our position sizes, executing smart trades, creating profits for our members and continuing to seek out the best opportunities in the future.

Let this news event play out over the next few days.  Let the markets figure out where price wants to go after all the dust settles.  There will be lots of opportunities for more great trades in the future.

Chris Vermeulen 
www.TheTechnicalTraders.com

Globalism and The Economy

Is the US still the world’s leading superpower?

While the strong global economic growth of the late 19th and early 20th centuries was driven in part by the two first phases of industrialization and the transport revolution in Western Europe, successive wars on the old continent have weakened growth and European countries. Since then, globalization has given a boost to global growth, while propelling the United States to global superpower status.

earth

What is globalization?

Globalization is all about commercial interaction between different parts of the world. These flows can be exchanges of goods, capital, services, people or information. This was all made possible by the improvement of the means of communication (NICT), the containerization revolution, the very low cost of maritime transport, the increasing liberalization of trade (GATT and then WTO in 1995) and the deregulation of financial flows between countries.

Since the 1990s, globalization has accelerated, with the fall of the USSR, the rise of the Internet, the creation of the World Trade Organization (WTO, 1995) and regional free trade agreements such as NAFTA all contributing to this acceleration.

With the First World War, the United States quickly became the world’s leading economic centre

In 1945, the US held ⅔ of the world’s gold stock and accounted for 50% of global production. The new world economic order was organized by the US (IMF and IBRD in Bretton Woods in 1944, GATT in 1947), and their currency – the American dollar, or USD – became the currency of international trade. Wall Street in New York became the economic and financial heart of the world.

What made the United States a unique superpower?

The American democratic, capitalist and liberal model, as well as the American way of life, spread to the non-communist world, with the Marshall Plan (1947) and the development of multinational companies.

By the end of the 20th century, the emergence of mass media and the Internet revolution gave Americans the opportunity to influence the entire world even more.

With the development of mass consumption that began in the 1950s, many American products arrived on other markets. Some products are now an integral part of the lives of many Europeans, Asians and South Americans, such as the Visa card, sportswear such as Nike, soft drinks such as Coca-Cola, fast food such as McDonald’s, as well as American music, cinema, universities, etc.

This undeniable cultural influence, called “soft power”, is a huge source of influence for the US across the world. This “soft power” indirectly influences and positively shapes the view of the USA in the eyes of other countries. This power makes adoption of the American point of view much more palatable to other countries, all without the need for force or threat.

In addition to “soft power”, there is also “hard power”, characterized by economic hegemony, technological progress (information technology, nuclear, space conquest) and first-rate military and diplomatic power, which make it possible to impose the will and power of the United States on the rest of the world by force or intimidation.Earth from space

The US – the powerful (and criticized) nation at the heart of globalization

The American system arouses as much wonder as questions/criticism in regards to their management of the social crisis and poverty, political extremism, weak environmental protection measures, etc. It could be argued that American influence has declined in recent years, although the country remains a first-rate power that dominates many sectors of activity.

First of all, we can see heightened criticism of the American hegemony, even if anti-Americanism is not exactly a new phenomenon. Several countries (Russia and China foremost among them) and political currents reject the American model, while US involvement in foreign wars are subject to the harshest criticism.

The United States is also experiencing an increasing number of economic competitors, such as from the European Union and the BRICS countries (Brazil, Russia, India, China and South Africa). The subprime crisis in 2007 also eroded the power of the US, both immediately following the crisis, and in the years since.

China became the world’s leading economic power ahead of the United States in 2014, after 142 years of “American rule” according to IMF figures. The increased debt burden and evidence of the United States’ dependence on foreign capital (particularly Chinese capital) is also a factor that challenges US supremacy.

How has the election of Trump altered the future of globalization?

The surprise election of Donald Trump as the 45th American president invites a re-evaluation of the future of the global economic order. Movement of goods, money, and people across international borders have all certainly changed since Trump’s election, as “resistance to globalization” was one of his prominent policy themes during his election campaign, with particular emphasis on the US-China relationship.

China and the United States have an extensive – but tense – economic partnership, often triggering periods of conflict, such as the current situation. Trade tensions have significantly increased since 2018, when Trump first sought to limit Chinese economic influence with tariffs.

Trump’s plan to reduce his country’s dependence on China focuses on increasing taxes on their imported products, so American products are favored locally and purchased instead. Of course, China reacted by increasing taxes on American imported products. These trade tensions and tariffs could cut global output by 0.5% in 2020, according to the IMF. Consequently, the organization cut its global growth forecast.

”There are growing concerns over the impact of the current trade tensions. The risk is that the most recent US-China tariffs could further reduce investment, productivity, and growth,” said IMF chair Christine Lagarde.

Trump’s wish to implement US protectionist policies will have one important consequence for the country: as the USA turns inward on worldwide economic integration, this will certainly have an impact on global stocks and flows. Knock-on effects to this policy, such as retaliation from countries like China, canceled contracts with American companies and suppliers, and countries that seek to imitate Trump’s anti-globalization agenda (like Greece and Hungary), may also all lead to significant consequences for the global economy.

What consequences on the global economy can be expected if the trade war escalates?

As noted by the European Central Bank in its analysis on Implications of rising trade tensions for the global economy, the impact of an escalation of trade tensions could be felt in different ways.

”In the case of a generalized global increase in tariffs, higher import prices could increase firms’ production costs and reduce households’ purchasing power, particularly if domestic and imported goods cannot be substituted for each other easily. This could affect consumption, investment and employment. Moreover, an escalation of trade tensions would fuel economic uncertainty, leading consumers to delay expenditure and businesses to postpone investment,” declared the ECB.

How to take advantage of the changes in our interconnected global economy? 

”In response to higher uncertainty, financial investors could also reduce their exposure to equities, reduce credit supply and require higher compensation for risk,” added the European organization.

It’s worth mentioning that ”through close financial linkages, heightened uncertainty could spill over more broadly, adding to volatility in global financial markets”, which can create great trading opportunities for investors.

Thankfully, there are plenty of available instruments that can turn a profit in any market condition. You can short an Index, diversify into a new, more promising, geography or just bet on volatility. The main things to watch for when seeking such exposure is that your broker is regulated and the scope of instruments it can provide. It doesn’t hurt when a broker has a robust, efficient and reliable trading platform, such as Multibank Group.

Times of great uncertainty breed great opportunities, investors and traders can make the most of the potential changes in the world order by focusing on the most promising region, or business sector.

Bottom-Line

The United States remains one of the world’s largest economies. It is a major power that excels in many areas, with an influence that is exercised both with hard power (economic, military and diplomatic power) and soft power (cultural influence).

However, the country faces many challenges, challenges that threaten to erode its role as a superpower, such as the emergence of significant economic competition from other countries, and their recent policy shift to economic isolationism.

Highly integrated into globalization, the recent decisions of the United States regarding greater protectionism, and the hard retreat from globalization wanted by Trump, affect the world economic order and global trade flows.

The current global climate is well encapsulated by Harvard Business Review – ”the myth of a borderless world has come crashing down. Traditional pillars of open markets – the United States and the UK – are wobbling, and China is positioning itself as globalization’s staunchest defender”…


This article is brought to you by the courtesy of Multibank Group.

Read our Multibank Group review

The U.S. economy Cooling as an Incentive for Trade Negotiations

Weak U.S. data cooling markets

Trump chose not a good time for trade disputes, as the economy cyclical slowdown after 10 years of growth and tax incentives worsen trading conditions.

The United States economic statistics published on Thursday disappointed market participants, causing a decline in major stock US indices by 0.4%.

Household cautions

Existing homes market sales declined in January by 1.2% to a 3-year low after falling by 4% a month earlier. Such a decline could be attributed to the American government’s shutdown, but the downtrend has remained unchanged since March last year.

Business cautions

Weak home sales statistics complemented the general picture of the business sector alertness. Durable goods orders were worse than expected.

The construction slowdown in the United States is difficult to associate with trade disputes. Rather, it is a very unpleasant coincidence. But the apparent durable goods orders weakening since May last year perfectly reflects the business alertness.

World trade cautions

At the global level, trade disputes led to a decrease of the WTO’s world trade index at the beginning of the year to a minimum of 9 years due to a decline of the manufacturing and sales for cars, electronics, and agricultural raw materials.

More flexible policymakers?

Many warning signals from the economy do not yet allow us to talk about the inevitable and imminent stock markets collapse, but they warn of future difficulties. Similar market cooling signals are also noted in China, where production is stagnating, and auto sales are declining. If the politicians of the two largest economies in the world pay attention to these signals, this can speed up negotiations, showing the economic price of a lack of political flexibility.

Or more creative Central bankers?

If the negotiations continue to be delayed, we’ll get even more alarming signals. High government debt burden limits fiscal stimulus. That is, central banks will have to invent new ways to stimulate the economy, since interest rates are still around zero, leaving no room for manoeuvre.

This article was written by FxPro

The Demand for Risky Assets Has Risen Sharply Thanks to China and the U.S.

The U.S. and China have declared a truce in the trade war, and have agreed not to introduce new tariffs, and try to reach an agreement in the next 90 days. As a result, the U.S. dollar has been languishing at lower levels while the stock markets have been rapidly climbing upwards.

Shanghai’s stock exchange, blue-chip index, China A50, has risen by more than 3% so far while Hong Kong’s Heng Seng has increased by 2.7%. Meanwhile, futures for the American S&P 500 have climbed by 2.5%, marking a 6.8% growth over the last 10 days.

The dollar retreated to its monthly lows against the Chinese yuan, decreasing by 0.7% since the start of the day. Crude oil has increased by more than 5%, thus rising to $62 and $53.4 per barrel for Brent and WTI respectively.

In addition, oil price surged due to the expectation of a decline in production in 2019 following the meeting of OPEC and other major exporters scheduled for this week.

It seems that investors preferred to focus on the positive signals and in particular, on the fact that there will be no new tariffs in the next three months. Meanwhile, the pressure arising from the fears of a growth slowdown in the light of trade tariffs had pushed the shares of the Chinese companies down in the preceding months. As a result, the China A50 index had reached a lower level of the trading range for the last 5 months, below 11,000. In the case of the development of positive dynamics, China A50 index, which is now at 11,250, may not meet substantial resistance up to 11,800.

S&P 500 will have to pass an important test earlier. During the knee-jerk reaction on Monday, the index climbed above the 200-and 50-day moving averages, which according to technical analysis, is a strong signal to buy. At the moment, futures are situated around 2810, at which point the index retreated to a decline in October and November. Thus, its ability to climb above that point will reflect the positive attitude of market participants and as a result, it may rapidly return to the October’s highs.

The dollar will have to pass an equally important test. The dollar index fell by 0.5% this morning, testing the support area for its uptrend. The demand for risky assets has been growing and the main reasons were the expectations of a breakthrough in trade negotiations as well as the softening of the Fed’s tone. All these factors may break the U.S dollar’s upward trend.

This article was written by FxPro

US Yields Accelerate Extremely Higher, Dollar Rises Sharply to Six-Week Highs

The 10-year benchmark yield was trading at the current cycle highs near 3.1% on Wednesday, while the 30-year yield rose to fresh highs at 3.26%. The short-end of the yield curve has risen as well, although at a slower pace and, therefore, the yield curve has steepened over the last couple of days.

Last week, the Federal Reserve again raised rates and upgraded the economic outlook for upcoming quarters, while inflation remained the same, but still above the 2% target. This could mean that the Federal Open Market Committee expects the US economy to continue with a strong momentum but without any significant inflation pressures. Therefore, the tightening of the monetary policy may maintain its pace and 2019 could bring with it another four-rate hike, unless the economic momentum drastically deteriorates.

More positive information came to light on Wednesday. This included the publication of the latest ADP employment report, which showed that employment increased by 230,000 in September, well above 185,000 that analysts predicted. Another piece of good news came in the form of the non-manufacturing ISM survey which soared to 61.6 for the month of September, against forecasts of a drop to 58.0 from 58.5 scored in August. The greenback rose afterward, but more importantly, US yields surged sharply.

Investors expect another strong labor market report on Friday, as the unemployment rate expecting to drop further to 3.8%, while the Nonfarm payroll could create around 200,000 jobs. Wage growth could tick higher to 3.0% annually, which might be another signal for yields to rise.

There is only one problem with rising yields – stock markets might get spooked by them. Rising yields and quantitative tightening may effectively reduce the amount of money circulating in the economy and therefore stock buybacks, which are supporting the stock markets on every dip, might eventually get more expensive. Should the current pace of monetary tightening and rising yields continue, we could see a bigger correction of the stock markets sometime in 2019, as one of the biggest stock buyers – companies performing buybacks – could be absent the next time the market drops.

Analysis and opinions provided herein are intended solely for informational and educational purposes and don’t represent a recommendation or an investment advice by TeleTrade. Indiscriminate reliance on illustrative or informational materials may lead to losses

MiFID II – What You Need to Know

Trading online is highly fluid, not just because of the dynamic nature of the global markets and economies, but also the constantly evolving laws and regulations. At AvaTrade, our clients are our top priority and as part of our commitment to our traders, we are always staying abreast of these regulatory changes to ensure that we remain fully compliant.

Fundamentals of MiFID

The first version of MiFID (Markets in Financial Instruments Directive) came into effect across the EU in 2007 and it is the cornerstone of the EU’s financial markets regulation. The aim of MiFID was to improve competitiveness for investment services and provide protection for investors in financial instruments by establishing:

  • A code of conduct and organizational requirements for investment firms
  • Authorisation requirements for regulated markets
  • Reporting to prevent market abuse
  • Trade transparency for shares
  • Rules on the admission of financial instruments for trading

Over the years, there have been various proposals and debates around the revision of MiFID, and the final legislative texts were finally adopted by the EU Parliament in June 2014. This revised version, which includes MiFIR (Markets in Financial Instruments Regulation), became collectively known as MiFID II and it came into effect in January 2018.

Assisting in the technical standards, advice, and implementation of the regulation is ESMA (European Securities and Markets Authority), an independent EU Authority. ESMA continues to play an active role by creating a supervisory culture and practices, including the development of Q&A’s (questions and answers) to help organizations in the implementation of MiFID II. ESMA, while independent, reports to various EU bodies, including the EU Parliament.

Introduction of MiFID II

At the beginning of 2018, MiFID II came into effect for investments firms. This new legislative framework was designed to not only strengthen investors protection but to provide additional transparency; the fairer, safer, more resilient, and efficient functioning of the financial markets.

In summary, some of the key issues that MiFID II addresses:

  • Removal of trading bonuses – under the new regulation, brokers cannot offer trading bonus incentives to clients.
  • Professional trader classification – based on a questionnaire that clients complete and other criteria, clients must be classified as either retail or professional traders. Depending on the client’s classification, they are entitled to different features and benefits. For example, the amount of leverage.
  • Reduction in leverage for retail clients – while leverage can be a great tool to maximize profits, it can also magnify losses. Overall, the amount of leverage that can be given to clients who are classified as ‘retail clients’, has been reduced.
  • Avoiding conflict of interest – one of the key concerns that MiFID addresses is the avoidance of conflict of interest between brokers and their clients. The aim is to ensure that brokers continuously act in the best interest of their clients.
  • Registering of automated trading algorithms – under the new regulation, algorithms used for automated trading have to be tested, registered and have protection measures built-in.
  • Greater transparency and reporting – brokers must provide more detailed reporting on trades, including volume and price, as well as keep records of all communications and conversations with their clients.
  • Communication simplicity and clarity – all communications, especially marketing communications, must be clear, fair and not misleading. Plus, the risks of investing in financial instruments must also be clearly stated.

In conclusion

The new regulation has been in the making for many years, with many iterations and will continue to adapt and evolve. The entire MiFID document is almost 7,000 pages, but the essence of this framework is to ensure a fair, transparent and more secure environment for all stakeholders, especially investors. The above is a highlight of just some key areas that MiFID II deals with. AvaTrade clients can have complete peace of mind knowing that AvaTrade complies with these regulations and will always act in their clients’ best interests.

For more information detailed information on MiFID, please visit: https://www.esma.europa.eu/policy-rules/mifid-ii-and-mifir

Vintage Investing, Vintage Profits?

Anything vintage is widely regarded to be the best in its class. For instance, when talking about vintage stocks, the first thing that comes to mind is blue-chip companies that appreciated in value. The likes of Apple Inc. (NASDAQ: AAPL), Alphabet Inc. (NASDAQ: GOOG), Amazon.com Inc. (NASDAQ: AMZN) and Microsoft Corporation (NASDAQ: MSFT) and the list is long, and a lot varied than the few names mentioned above.

These stocks, among several others quality companies, also make up the list of CFD-tradable stocks on many brokerage platforms. Brokers are traditionally stricter on smaller companies being part of their list of available CFDs. Quality attracts more investors meaning that blue-chip stocks are highly liquid, which makes them ideal for CFDs.

But what really is vintage investing?

Vintage investing does not stop with buying blue-chip stocks. It encompasses a far wider market than just stocks. For instance, Etsy Inc. (NASDAQ: ETSY) describes itself as an e-commerce marketplace for vintage goods. Such include archaic artworks, handmade goods and many more.

However, over the years, vintage investing has been more about buying things that stand out from the rest rather than investing in quality stocks. Supercars, for instance, have historically been among the best vintage items to invest in while others prefer wearable items like jewelry and watches.

So, supercars

This may not sound like something that you would associate with investments because the general view out in the world is that people who buy these expensive products, sometimes popularly referred to as ‘collectors’, buy them for luxury. However, some of these items as mentioned in the previous paragraph, supercars, tend to appreciate in price with age. So, the older they become, the more expensive they get.

And just to illustrate how profitable investing in supercars can be, this article published by The Telegraph a few years ago puts things into perspective. Investing in rare cars, in this case, supercars can result in huge profits. For instance, the article notes that the price of a Ferrari LaFerrari more than doubled between the years 2014 and 2015. This clearly shows why investing in collectors’ items could be one of the best forms of investing.

Luxury watches?

The same thing applies to luxury watches. In this case, one type that stands out from the rest is the Rolex watch. Some people believe that if a person reaches the age of 50 years without ever owning a Rolex watch, then it is probably a sign of failure in their life. However, many vintage watches have emerged over the years, some even more expensive than the traditional Rolex watch. Brands like Hublot, Michael Kors, and Patek Philippe have launched their own vintage watches that cost a lot more than their Rolex counterparts.

Some watches cost millions, but that is mostly down to the number of diamonds and gold used in them. This does not necessarily lock out those who are not wealthy enough to spend millions on a watch. Top brands like Seiko, Armani, Diesel, and Rotary, among others, provide interested investors with varied options that fit their budget. For instance, a quick search for these brands at Tic Watches shows that investors can buy their preferred brand from as low as a few hundred US dollars while those looking for a little bit of class there are some that cost a few thousand.

One interesting fact about luxury watches is that most of them never depreciate in price. The price always goes up even when the global market is experiencing a recession. For instance, this article published on Business Insider, shows the price appreciation of the Rolex watch over a 60-year period, dating back to the 1950s. During this period, global markets experienced recessions causing major crashes in the stock markets. However, the price of the Rolex watch and many others continued to climb, rising from $150 or ($1,265-inflation adjusted) in 1957 to $7,500 in 2014.

And just for comparison, the S&P 500 gained about 177% between 1996 and 2014. In 1996, one Submariner (No-Date) Rolex watch model 5513/14060/14060(M) cost $2800 according to the Business Insider article, which implies a gain of about 168% during the same period.

Conclusion

It is correct to say the difference isn’t that much. However, when you factor in the stock market crashes and the fear, stress, and anxiety that comes with it, it could have been better for some investors to opt for the steady returns presented by investing in vintage products. After all, how many investors get it right in the stock market? It could be a good time to consider putting some money in vintage products. It is hard to predict when the next recession will hit the market.

What is VIX and How Can You Trade It?

The CBOE Volatility Index (VIX) is a market index used to measure the general volatility of the stock market as implied by the S&P 500 Index Options over time. It is calculated and published by the Chicago Board Options Exchange. Analysts and traders use it to predict how volatile the market is likely to be in the foreseeable future. As such, it has gained many trading names over time including ‘the fear index’, or simply ‘the VIX’ among others.

The VIX uses the S&P 500 Index (SPX) options to capture the expected volatility for the next 30 days. The index uses the two options expirations that have more than 23 days and less than 30 days to narrow down on the 30-day timeframe.

Volatility Index Chart
Volatility Index Chart

As demonstrated on the charts above, the VIX and the SPX appear to have a direct relationship with significant spikes and curves occurring just about the same time, or within a 30-day period. This white paper the Chicago Board Options Exchange explains the whole relationship properly and also illustrates how the VIX is calculated using the SPX options.

Trading the VIX

So clearly, it looks like trading the VIX would be pretty a simple task. However, as it turns out, you cannot directly trade the VIX. However, as expert traders at Engine forex point out, the two key extremes of the VIX are known ahead of time that makes it a lot more complicated than it visually appears to be. As such, traders try to trade the VIX by trading products that track the volatility index.

Therefore, the market has created various products that traders can use to capitalize on the opportunities created by tracking the VIX. Most of these are ETNs that allow traders to hedge using funds. Some of the notable ETNs in the market today include VelocityShares Daily Inverse VIX Short-Term ETN (XIV) and the iPath S&P 500 VIX Short-Term Futures ETN (VXX).

When using the VXX to hedge against market volatility, analysts and online trading experts seem to have a bias towards going long when they anticipate a market correction in the foreseeable future. This decision is usually taken when the VIX appears to bottom indicating that it cannot go any lower.

However, as many traders have found out, this theory does not hold when individual funds and ETNs are involved. Sometimes these have moved lower, even when the VIX appeared to have bottomed, which again illustrates the potential impact of trading an asset that tracks a predictive measure of market volatility.

Therefore, in order to understand better how to trade products that track market volatility, it is important to use a shorter timeframe, in this case, the Volatility Index pegged to short-term S&P 500 Index options, represented by the Mini SPX Index Options (XSP).

It is pretty much like using a narrower window to determine how volatile the market is likely to be for the next few weeks, which is likely to return more accurate results.

In general terms, the VIX has also been used to determine the overall market sentiment and views towards the economy. When the market has a bullish view on the economy, the VIX tends to rise as investors flock to the stock market to invest in capital assets.

This is very well demonstrated in the chart above. Starting in late January 2018 to early February 2018, the market experienced one of the sharpest bull-runs in a long time as speculation hit multi-year highs, and this can be seen on both the S&P 500 Index and the CBOE Volatility Index.

However, what followed shortly after was a period of low market volatility as normalcy returned with most of the investors having exhausted their investment capital. Since then the VIX has traded within what appears to be a tighter range and this indicates high levels of market stability. This is also backed by the steady rally in the market as demonstrated by the SPX.

In summary, the VIX predicts market volatility and due to its wider timeframe, it is hard to target the two extremes making it difficult to trade directly. However, traders have adopted the practice of trading products that track the VIX and as demonstrated on the charts, it tends to pay off some of the time.

The Difference Between Fiat Money and Cryptocurrencies

The fact that some people, nowadays, transact through electronic money continues to affirm suggestions that cryptocurrencies could be the currencies of the future. However, it will take some time before they find their way into the mainstream sector, given the strong opposition from regulators around the world.

Even as the world moves towards a cashless society, very few people have an idea of how different cryptocurrencies are from fiat currencies.

What Is Fiat Money?

Fiat Money is a kind of currency, issued by the government and regulated by a central authority such as a central bank. Such currencies act like legal tender and are not necessarily backed by a physical commodity. Instead, it is based on the credit of the economy.

Fiat currencies such as the US Dollar, Pound or Euro derive their value from the forces of supply and demand in the market. Such currencies are always at risk of becoming worthless due to hyperinflation as they are not linked to any physical reserves such as commodities.

Fiat currency first came into being at around 1000 AD in China before spreading to other parts of the world. Initially, currencies were based on physical commodities such as gold. It is only in the 20th century that President Richard Nixon stopped the conversion of U.S dollar into gold.

Advantages of Fiat Money

Fiat Money has remained legal tender in most countries in part because they are highly stable and controlled. Unlike other forms of money, such as cryptocurrencies and commodity-based currencies, fiat currencies are relatively stable. The stability allows regulators and governments to navigate the economy against recession and inflation.

Stability also allows fiat money to act as a means of storing value and facilitating exchange. It can also be used to provide a numerical account. Greater control also allows central banks to manage various economic variables such as liquidity, interest rates and credit supply key to ensuring a robust, stable economy.

Disadvantages of Fiat Money

Though Fiat Money is considered a stable currency, yet that is not always the case. Economic recessions over the years have highlighted some of the deficiencies associated with Fiat money. The fact that a central bank’s greater control at times does little to stop inflation or recession has led most people to believe that gold could be a much stable currency given its unlimited supply. The notion of central banks control over the economy and the constant increase in global prices create the need for cryptocurrencies.

What is a cryptocurrency?

A cryptocurrency is a form of digital or virtual currency that can work as a medium of exchange. Being virtual in nature, they use cryptography technology to process, secure and verify transactions.

Unlike Fiat currencies, cryptocurrencies are not controlled by any central authority such as a central bank. Instead, they are limited entries in a database such as a blockchain that no one can change or manipulate, unless certain conditions are met.

Cryptocurrencies came into being as a side product of Satoshi Nakamoto, the brainchild behind Bitcoin cryptocurrency. Nakamoto did not intend to develop a currency but a peer-to-peer electronic cash system for facilitating transactions without any central oversight.

The decentralization aspect of the network means there is no central server where transactions are hosted or controlling authority. In a decentralized network like Bitcoin, every transaction to have ever happened is displayed for everyone to see. Each transaction file also consists of senders and recipients public keys.

Cryptocurrencies Advantages

Cryptocurrencies are available on a click of a button, all over the world. Anyone that can make an online transfer can also acquire and own a digital coin of choice. Although the process is still complicated, in the futures, it will be easier to transact and own cryptocurrencies.

Fast settlement times are another attribute that continues to accelerate widespread adoption of virtual currencies. Unlike other electronic cash settlement systems that take days to process transactions, cryptocurrencies enable instant settlements.

Lower transaction fees have seen cryptocurrencies emerge as a preferred means of sending money across borders. Transferring money using other bank gateways can be quite expensive given the number of fees charged along the way.

Privacy is another aspect that has made cryptocurrency desirable as users don’t have to share their identity to be able to complete transactions. There are altcoins which the main functions are to maintain the privacy of people behind transactions.

Disadvantages of Cryptocurrencies

Cryptocurrencies can be quite difficult to understand – one of the reasons why some countries and regulators continue to shun them. A lack of knowledge on how to use them is another headwind that continues to clobber digital currencies prospects and sentiments.

The fact that it is not possible to reverse a transaction once it is made is another headache that has forced most people to shun cryptocurrencies. If a wrong a transaction is made the only thing one can do is ask for a reversal from the recipient. There is nothing one can do on recipients of a wrong transaction turning down a request for a refund

Volatility is by far the biggest disadvantage that has clobbered cryptocurrencies sentiments. Volatility goes a long way in affecting the value of a coin, which can be difficult to comprehend or contend with.


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Differences Between Fiat Money and Cryptocurrencies

While both fiat money and cryptocurrencies can be used as a means of payment, there are some differences.

Legality

Governments issue fiat currencies, which are in return regulated by the central bank. Fiat money is deemed legal tender in that it is often the official means of finalizing transactions. Governments control fiat money supply and issue policies from time to time that affects their value.

Cryptocurrencies, on the other hand, are merely digital assets that act as a medium of exchange that governments have no control over. The decentralization aspect means no central body can control or influence their value.

Some countries have banned cryptocurrencies on concerns that some of them are being used to fuel illegal activities such as terrorism and money laundering.

Tangibility

It is not possible to have a physical feel of cryptocurrencies as they operate online as virtual coins. Fiat currencies, on the other hand, have a physical aspect as they can exist as coins and notes thus possible to have a physical feel. Fiat money physical aspect at times does present a lot of challenges as it can be a nuisance to move around with vast chunks of money.

Exchange Aspect

Cryptocurrencies exist in digital form as they are created by computers and operate as private pieces of code. The means of exchange is thus purely digital. In contrast, fiat money can exist in both digital and physical form. Electronic payment services allow people to transfer fiat money digitally. In addition, people can transact with one another and exchange money physically.

Supply

A major difference between fiat money and cryptocurrency has to do with supply. Fiat money has an unlimited supply which means central authorities have no cap to the extent in which they can produce money.

Most cryptocurrencies have a cap when it comes to supply, which means there is a set amount of coins that will ever be in supply.  For example, the total number of Bitcoin coins that will ever be in supply is capped at 21 million.

With fiat money, it is impossible to tell the amount of money in circulation at any given time, but with cryptocurrencies, it is possible.

Storage

Cryptocurrencies virtual aspect means they can only exist online thereby stored in digital wallets commonly referred to as cryptocurrency wallets. While most digital wallets claim to offer secure storage, some of them have been hacked resulting in people losing a substantial amount of holdings.

The versatility of fiat money, on the other hand, means it can be stored in various forms. For instance, there are payment providers such as PayPal that allow people to store fiat money in digital form. Banks also do act as custodian of hard currencies.

Bottom Line

Cryptocurrencies and fiat money come with attributes that make them stand out as a means of legal tender regardless of jurisdiction. However, they also come with cons that have seen them continue to divide opinion around the world.

While there are many advantages of cryptocurrencies over fiat money, it seems that cryptocurrencies are not yet mature to replace the current standard payment method. It is a matter of time and not necessarily will be in the form of Bitcoin, Ethereum or any other cryptocurrency. The crypto market will most likely evolve to create a positive product that might change the current money system.