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Wednesday, February 17, 2021
Risk Asset Prices Climb on International Capital Markets
ANBOUND

As China celebrates its annual Spring Festival (also known as the Chinese New Year), capital markets outside of China continue trading normally. During this period, as the new round of stimulus plan in the United States is about to be implemented and the outbreak of COVID-19 is gradually brought under control by the acceleration of vaccination, the international capital market ushered in a comprehensive rise. In the U.S. stock market, the Dow consistently hit new highs, while Asian markets like Japan and Hong Kong also ushered in historical highs. At the same time, the price of digital assets dominated by Bitcoin has soared and has since become the focus of the market.

Since August 2020, Bitcoin has continued to lead in the capital market. After hovering above USD 10,000, it has successively broken through various integer barriers and has risen five times its original value so far. Boosted by the news that Tesla has announced the purchase of USD 1.5 billion worth of Bitcoin, the value of the cryptocurrency has continued to rise since late last week to a record high of USD 49,000 per coin on February 12. On February 16, it hit a record high again, rising above USD 50,000. Before the U.S. stock market opened on February 17, Bitcoin reached USD 51,000, again setting a new record high. Bitcoin, the world's largest cryptocurrency, has risen by about 70% in value this year alone.

Currently, Bitcoin is receiving more and more attention from investors and companies. Elon Musk's remarks on Bitcoin has caused dramatic fluctuations in the price of said cryptocurrency, and this is reflected in the market not being able to reach a conclusion on its true value. The attitude of mainstream financial institutions is now also clearly divided. The United Bank of Switzerland, the Bank of America and other institutions have bluntly stated that cryptocurrencies have no value and are mere "bubbles", while investment banks like JP Morgan Chase and Citibank have shown positive attitudes towards Bitcoins. At the same time, more and more institutions, including MasterCard and Bank of New York Mellon, are attracted by potential interests and have begun to try and enter the cryptocurrency business. In addition, Apple Pay, Google Pay, etc. have all reported that they will begin to accept Bitcoin as payment. PayPal also plans to expand its cryptocurrency business to a wider range of international markets. All of the above-mentioned various situations have promoted the rising prices of virtual assets such as Bitcoin.

With the vaccination continuing to progress, investors who are betting on the recovery of the global economy are currently in favor of the stock market. The three major U.S. stock indexes hovered at high levels on February 16. As of the time of closing, the Dow rose 0.2%, closing at 3,1522.8 points, continuing to set a historical record; the S&P 500 index fell slightly by 2.2 points and closed at 3932.6 points; the Nasdaq fell 0.3% and closed at 1,4047.5 points; the three major indexes rose by 0.27%, 0.59%, 0.54% respectively as compared to before the Spring Festival (February 10). Since the Spring Festival, the European Stoxx 50 index rose by 1.81%, the French CAC40 index rose 2.05%, and the UK FTSE 100 index rose by 3.43%. After the meeting between the leaders of China and the United States, the Asian stock market ushered in a continuous rise. The Hong Kong stock market continued to rise in the two days after the Spring Festival by a total of 3.48% on February 17 as compared to February 10. With the depreciation of the yen and the expected improvement in Japan's economic prospects, the Nikkei 225 index broke through the historical threshold of 30,000 points, up by 2.47% from February 10. President Haruhiko Kuroda from theBank of Japan (BOJ) said that the recent stock market rise reflects optimism surrounding the outlook for the global economy.

The extreme cold weather in the United States has led to higher energy prices while the expectations of the Biden administration's new round of stimulus measures have triggered a higher inflation. The 10-year breakeven inflation rate, which measures inflation expectations, has risen to its highest point since 2014. On February 16, the prospect of reinflation pushed the benchmark U.S. Treasury yield to break by 1.25% for the first time in 11 months. As of February 17, the 10-year U.S. Treasury yield stood at 1.27, breaking through the key level of 1.25% for the first time since March 2020. At the same time, the 30-year U.S. Treasury bond yield rose to 2.08%. Wall Street market participants believe that the main reason behind this is that the Biden administration can progress towards realizing the USD 1.9 trillion COVID-19 relief plan as the number of new infections has declined and the vaccine has been successfully launched. This has had a corresponding impact on the bond yields in the euro zone. The yield on German 10-year government bonds rose to the highest level since June last year, rising 3 basis points to -0.353%. Yields on most other high-rated Eurozone bonds also rose 2-4 basis points. The high yield of national debt is causing the dollar to rise. Compared with all other major currencies, the U.S. dollar is at a high level, rising 0.21% against a basket of currencies of 90.508 on February 16.

The rise in both the exchange rate of the U.S. dollar and U.S. bond yields has put increasing pressure on the price of gold as a safe-haven asset. Spot gold fell sharply on February 16, with an intraday drop of nearly 1.5% and a drop of 0.6% throughout the day, closing at USD 1806.57 per ounce. At the same time, BlackRock, the world's largest asset management company, disclosed that in the fourth quarter of 2020 it sold ETF GLD gold worth USD 471 million and bought ETF SLV silver worth USD 29 million. The company emphasized that gold has been transformed into a tool to hedge against falling interest rates. This change in correlation is not uncommon for gold. It also means that gold will be used as a tool to hedge against stock market fluctuations and stay within a certain range.

The main factor behind the changes of the international market is the impact of the COVID-19 pandemic. This is especially true since this year, where the situation of the pandemic globally has been continuously improved upon due to the positive effect of large-scale vaccinations, which has also pushed up the stock market. On February 15, WHO Director-General Tedros Adhanom said that the number of COVID-19's new confirmed cases worldwide has fallen for the fifth consecutive week. The number of new confirmed cases last week was the lowest in a single week since October last year. Since the beginning of this year, the weekly number of new cases throughout the world has dropped by nearly half, from more than 5 million new confirmed cases in the week of January 4 to 2.6 million in the week of February 8.

As the COVID-19 pandemic is gradually brought under control, it has resulted in a more optimistic outlook of the global economy. The New York Fed announced that its business climate index rose 8.6 points to 12.1 in February, the highest level since July. Moody's chief economist Mark Zandi recently stated that various indicators show that after the impact of the pandemic has subsided, the U.S. economy will experience a strong recovery. The European Commission's recent economic forecast for the winter of 2021 shows that the euro zone economy will grow by an average of 3.8% in 2021 and 2022. It is expected that the economic level of the Eurozone and the European Union will reach the pre-COVID-19 level earlier than the economic forecast in the fall of 2020. Due to the depreciation of the Japanese yen against major currencies, foreign exports are showing an optimistic trend as well. The Cabinet Office of Japan reported on February 15 that although the annual economic growth was negative, the annual growth rate of the Japanese economy in the fourth quarter of last year was 12.7%, marking two consecutive quarters of growth. Coupled with the new U.S. economic stimulus plan which will bring new dollar liquidity injection, the prospects of the global capital market are indeed optimistic.

However, since current global asset prices are already at a high level under liquidity flood, future changes in inflation will be the biggest uncertain factor. Moody's stated that a greater and more urgent threat to economic recovery is the inflation of asset prices. It pointed out that the stock market, housing market, bond market, commodity market, and even the cryptocurrency market has all been soaring recently. Due to extremely high valuations, these markets may be vulnerable to major adjustments and crashes, which may affect the entire economy. The S&P 500 has risen by nearly 300% in the past 10 years. This is rather similar to the conditions 10 years prior to the internet bubble burst which occurred over 20 years ago. Goldman Sachs analysts predict that by the time the economy returns to normal in mid-2021, American households will be forced to save as much as USD 2.4 trillion due to the pandemic. With the complete reopening of the economy, the proportion of households spending these savings may determine whether the economy recovers healthily or overheats. If consumption rebounds weakly, the degree of U.S. economic recovery will be greatly affected. If there is a consumption boom, a large amount of funds will flow from the financial market to the consumer market. Although this can promote rapid economic recovery and is beneficial to the development of U.S. stocks in the long run, a large amount of funds outflowing may lead to a major reversal of the rise in U.S. stocks and other assets in the short term. This means that the future volatility of global stock markets will increase.

Final analysis conclusion:

During the Spring Festival in China, the price of risk assets continued to rise as the COVID-19 pandemic is gradually taking a turn for the better, resulting in an optimistic outlook for the global economy. However, the implementation of a new round of stimulus policies in the United States and future changes in savings and consumption will have an impact on asset prices. Changes in the level of inflation in particular signify that global stock market risks have not only failed to converge, but have further increased.

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