Omicron variant: why the financial markets are fluctuating so much

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Like tightrope walkers. For a few days now, investors from all over the world have been watching each other, feverishly, walking on the rope of the stock market wondering what will become of them … Because after months of joyful inattention, with the markets in full euphoria, it is from now on the uncertainty that dominates. What if the appearance of the new Covid variant, potentially vaccine resistant, changes everything again? The situation certainly has nothing to do with the spring of 2020 when the pandemic caused a historic collapse on the markets. But financial assets, stocks and cryptocurrencies in mind, are at levels that the slightest grain of sand, especially in the context of the return of inflation, could take over the machine. And making investors fall from very (very) high.

Market capitalization record

In fact, the markets have never been at such a high level. In mid-November, the total value of world stock exchanges exceeded for the first time … 120 trillion dollars. On paper, this figure may seem absurd to you, and for good reason: it corresponds to an increase of over $ 30 trillion in just over a year. To understand what it represents, you have to tell yourself that $ 30 trillion represents about 10 times the CAC 40, the leading index of the Paris Stock Exchange, or the entire American stock exchange!

“Never before have central banks distributed such large sums in such a short time”

How to explain such an escape? The “financial markets” rocket actually benefits from several engines. First of all, the monetary policy of the central banks, led by the American Federal Reserve and the European Central Bank, which have injected record sums into the system since March 2020. According to estimates, they would have put on the table between 12,000 and 15,000 billion dollars. “Never before have central banks distributed such large sums in such a short time,” said Christophe Barraud, chief economist and strategist at Market Securities. And a not insignificant part of them end up investing in the financial markets.

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Record dividends around the world

The second driver corresponds to the massive recovery plans in the States, particularly in the United States where the Biden administration has just approved, almost in rapid succession, two plans – one of which is on infrastructure – for a total of over 2,000 billion dollars. But, more than that, the economic recovery and company results are the main drivers of the world stock exchanges. “The economy has experienced a very strong recovery in 2021, especially in the United States, where the growth rate is moving on a much higher trajectory than before the crisis”, emphasizes Nicolas Chéron, strategist at Zonebourse. As a result, the performance of listed companies is at an unprecedented level, even their dividends: they are expected to reach $ 1.460 billion this year, according to the company Janus Henderson, and investors are betting on it more than ever.

Could this beautiful mechanism be blocked? Nothing is ever safe with the markets, but waiting to see the impact of the new African variant, there is a real risk of overheating. First, because part of the price increase is also due to the massive share buybacks. This system, which consists of a company repurchasing its own shares, allows the stock market price to rise mechanically. And 2021 promises to be unparalleled in this regard: in the United States alone, share buybacks are expected to exceed $ 1.110 billion, beating the previous record of 2018, according to the company Birinyi.

The overheating is also visible with the price-to-earnings ratio of firms, which is the ratio of share price to earnings, which continues to rise in many sectors. The higher this ratio, the more it means that the company’s valuation is important in relation to its profits. At Tech, it is reaching historic levels. While it averages 10 in the auto industry, Tesla’s is over 500 … an almost unprecedented situation. “In the United States, in some sectors, we are at or even beyond what we saw before the Internet bubble burst in 2000,” warns Vincent Boy, market analyst at IG France. Latest sign of overheating: According to Dealogic, nearly half of the companies that went public this year (raising $ 1 billion) are now worth less than when they were listed …

Cryptocurrencies in orbit

The cryptocurrency market is also in great shape. In recent weeks it has crossed the threshold of the “capitalization” of 2.5 trillion dollars, and has even allowed itself a brief passage above 3 trillion dollars! In one year, this represents an increase of more than 500%: a year ago it weighed “only” 400 billion dollars. But are bitcoin and other digital tokens rising for the same reasons as stock markets?

While the trillions injected by central banks have obviously benefited them, the other engine of their outbreak is mainly on the development side of an ecosystem that now has hundreds of start-ups around the planet. In France, several companies such as Sorare and Ledger have made a sensational entry into the unicorn family, these “magical companies” which weigh more than 1 billion euros. “The sector has nothing to do with what it was during the previous bubble in 2017. It is much more mature,” stresses the manager of a French investment fund. Proof of this is also the arrival of banks, as well as payment giants such as PayPal and Mastercard, and even the car manufacturer Tesla.

Gold is approaching an all-time high

This is the paradox of the situation. While the markets are at high levels, gold is being considered the safe haven, it should – normally – be inactive or at least stable. But this too is on an upward trajectory. It is certainly not as dynamic as that of exchanges or cryptocurrencies, but the price of the yellow metal is evolving not far from its historical highs. At the end of November, an ounce was worth just over $ 1,700.

The express

So, simple effect of the liquidity injections? In reality, things are a bit more complicated. The continued rise in gold is first and foremost a sign that a growing number of investors are expecting a market correction. As if this good health were an early indicator of future concerns … The reasons for this form of skepticism? First of all, the fear of a return of the ruin of the financiers, inflation. The mechanism is simple: inflation raises interest rates, and therefore the borrowing rate of government bonds, which in turn become very attractive – safe and profitable – investments at the expense of stocks and cryptocurrencies. However, according to the latest data, price slippage is on the rise. In the euro zone, it is their strongest increase since 2008 … “With the addition of a potential new variant, anything is possible on the markets,” explains an investor. Meanwhile, investors continue to advance on their rope.



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