The charts that matter: US dollar continues its bull run

Welcome back. 

In this week’s MoneyWeek magazine, we’re concentrating on inflation. Merryn talks to the Bank of England’s outgoing chief economist, Andy Haldane, who explains why price rises might prove rather more stubborn than many people think. We’ve also got a feature on how to buy into emerging markets – notoriously difficult – by using UK stocks as a proxy. If you’re not already a subscriber, sign up now.

This week’s “Too Embarrassed To Ask” looks at “zombie companies” - a term you may well have heard in this low-interest-rate environment. You can watch that here.

We’ve another big hitter on the MoneyWeek Podcast this week. Merryn talks to Jim Mellon, one of our favourite investment gurus. Jim explains what he’s buying – a lot of UK stocks – and why, with plenty of tips for you to investigate. They also talk about Big Tech (and why he’s not buying that), Big Oil (and why he is buying that), plus why Jim believes that the future of meat and dairy production lies not on the farm, but in the lab. Find out everything he has to say here. 

Here are the links for this week’s editions of Money Morning and other web articles you may have missed:

• Monday Money Morning: The central bank race for digital currencies is hotting up
• Tuesday Money Morning: What will pop the UK's house price bubble?
• Merryn’s blog: Private equity isn’t evil, it’s just doing what traditional investors should be doing
  Web article: What the FCA’s “ban” on Binance means for cryptocurrencies
• Wednesday Money Morning: Inflation? A Covid relapse? Markets are trying to work out what’s coming next
  Web article: Cathie Wood’s ARK Invest to launch bitcoin ETF
• Thursday Money Morning: The US dollar is in a bull market. That’s bad news for most assets
• Friday Money Morning: Record M&A activity is usually a toppy sign – what does it mean today?
• Cryptocurrency roundup: Binance “ban” and a bitcoin ETF

Now for the charts of the week. 

The charts that matter 

Gold continued to trade in a range.

Gold price chart

(Gold: three months)

The US dollar index (DXY – a measure of the strength of the dollar against a basket of the currencies of its major trading partners) perked back up in the latest leg of its bull run. That’s not good for any other assets, says Dominic.

US dollar index chart

(DXY: three months)

Dollar strength was reflected in the Chinese yuan (or renminbi) – when the red line is rising, the dollar is strengthening while the yuan is weakening. 

USD/CNY currency chart

(Chinese yuan to the US dollar: since 25 Jun 2019)

The yield on the ten-year US government bond continued to drift slowly down.

US Treasury bond yield chart

(Ten-year US Treasury yield: three months)

The yield on the Japanese ten-year bond turned sharply down.

Japanese government bond yield chart

(Ten-year Japanese government bond yield: three months)

And the yield on the ten-year German Bund slipped, too.

German Bund yield chart

(Ten-year Bund yield: three months)

Copper continued to slip, reflecting broader commodity-price weakness (oil excepted).

Copper price chart

(Copper: nine months)

The closely-related Aussie dollar followed copper down.

AUD/USD currency chart

(Aussie dollar vs US dollar exchange rate: three months)

Bitcoin continued to slip lower. Regulators are cracking down, says Saloni, which could dent the price further.

Bitcoin price chart

(Bitcoin: three months)

US weekly initial jobless claims fell by 51,000 to 364,000, the lowest since 14 March 2020. The four-week moving average fell by 6,000 to 392,750. 

US initial weekly jobless claims chart

(US initial jobless claims, four-week moving average: since Jan 2020)

The oil price wavered a little, but its bull run is intact. 

Brent crude oil price chart

(Brent crude oil: three months)

Amazon slipped further.

Amazon share price chart

(Amazon: three months)

But Tesla held on to its previous week’s gains.

Tesla share price chart

(Tesla: three months)

Have a great weekend. 

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Artists demand a fair share of the music industry pie

What’s happened?

Shareholders in the media conglomerate Vivendi have approved plans to spin off Universal Music Group, the world’s biggest record label, as a standalone business and list it on the Amsterdam stock exchange in September. Universal accounts for around a 30% slice of the global recorded music market, and its catalogue includes more than three million songs from many of the leading artists of every era, from The Beatles and Queen to Adele, Taylor Swift and Drake. Recently, the label has been making headlines in the financial pages as bidders jostled to build up stakes, including the Chinese giant Tencent (which owns 20%), and rival US hedge-fund billionaires Daniel Loeb and Bill Ackman. The latter’s special-purpose acquisition company (Spac) has just bought 10% of Universal for $4.2bn. That values Vivendi at $42bn and suggests that Vivendi was wise to turn down an acquisition offer of $8.5bn from SoftBank in 2013. The scramble for a slice of Universal also reflects the music industry’s changing fortunes.  

How have they changed?

Famously, the music industry had a torrid time of it in the 2000s as consumers snaffled content for free via file-sharing sites. Sales of physical CDs collapsed, and the nascent digital-download channel failed to make up the difference. Between 1999 and 2014, global revenues shrank by 40%. But since then, it’s been a growth story, with recording industry revenues growing by 54% between 2014 and 2020, to $21.6bn. The main driver has been technology. If the growth of the internet destroyed the record companies’ old business model, the ubiquity of smartphones facilitated the rise of the now-dominant streaming model, whereby record labels license their content to sites such as Spotify and Apple Music, and consumers mostly “rent” music rather than buy physical (or even digital) copies. In 2017, industry revenues from streaming surpassed sales of physical formats (CDs and the like) and downloads for the first time – and they’ve continued growing strongly since. In 2020, Spotify paid out $5bn to rights holders (mostly record companies), and YouTube (owned by Google) has paid out $4bn over the past year.

So all is rosy?

Revenues are up, but many recording artists say they’re not seeing their fair share. For a few, it’s great. Ed Sheeran’s Shape of You, the most streamed track of the past decade at 2.3 billion plays, is estimated to have made him $14.6m. But recently the classical violinist Tamsin Little reported that more than five million Spotify streams from albums she recorded in the 1990s had earned her £12.34. Paul Weller revealed in April that more than three million streams of his latest record, On Sunset, had made him £9,500 since its launch last July. According to Spotify’s figures, only 13,400 artists’ catalogues made more than $50,000 from the site last year (which is at least a jump from 7,300 in 2017). Only 7,800 artists worldwide made more than $100,000, and only 870 made more than $1,000,000. But these are not the sums received by artists; they are the sums paid to rights-holders who then pay on a slice to the artists depending on their contracts.   

So what do artists want?

The biggest gripes are (a) the opaque algorithms used by the streamers, which skew earnings towards the biggest artists; and (b) the fact that while performers take home about 50% of radio revenues, with streaming services that falls to about 15%. These complaints are levelled not just by lower-earners, but by the very biggest artists. This spring more than 150 of the top-selling names in British music signed letters urging government intervention to level the playing field and update the law in line with technological change. These included Paul McCartney, The Rolling Stones, Kate Bush, Tom Jones and members of Coldplay, Led Zeppelin and One Direction. The government is currently working on a response. 

How did streaming change the industry?

In the age of Spotify, it’s easy to consume songs via playlists without even knowing the name of the artist. That tilts power away from performers and towards songwriters. It has also made it harder than ever to break new acts and for artists to build long-term fan bases – both trends that raise questions over long-term revenue streams in the industry as the streaming model matures. At the same time, it has delivered lucrative new revenue streams for legacy acts, as new generations of listeners decide that the old songs really are the best. All these developments, together with the pandemic-related collapse in touring revenues (nowadays the main income stream for most artists), have also encouraged another music industry revolution: the moves by a growing number of big-name acts to sell off their back catalogues to investors.

How does that work?

“The industry has changed in the last 24 months because of one company,” reckons Mathew Knowles, the music executive and father of Beyoncé. London-based Hipgnosis Songs Fund – run by Merck Mercuriadis, an ex-manager of Elton John and Beyoncé, and co-founded by Nile Rodgers – has spent $1bn (£723m) on evergreen hit songs over the past year, buying the rights to 84 song catalogues from artists ranging from Neil Young to Shakira. It takes the total spent since it listed in 2018 to $2bn on 65,000 songs. Mercuriadis says that the pandemic accelerated consumption of classic songs through streaming. Now 60% of the songs it owns are more than ten years old – a big rise from the 32.5% slice in March 2020. Investors currently get a respectable 4.22% dividend, but should note that just 2% of its songs have provided 80% of its profits. Hipgnosis is essentially a way of buying into the future of songs through royalty rights, but as an asset class it’s new and unproven. Similar vehicles include Round Hill Music (which has spent around $650m), Primary Wave and Concord.

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The easy way to invest in emerging markets

• SEE MORE Buying foreign shares is easier than you think – here's how to do it

There has always been something intellectually topsy-turvy about investing in emerging markets. The theory is straightforward: if you invest in developing countries with young and rapidly growing populations, cheap labour, improving infrastructure and a reasonably clean government, then stockmarket returns should be greater than those from more mature, slower-growing economies. This was the yarn I both spun and believed during three decades of involvement in emerging markets in fund management, broking and corporate finance. 

Quite often, however, you were not buying into the local growth story, but into companies selling to multinationals in advanced countries, taking advantage of cheap local labour, a lack of employment rules and low taxes. A good example is the iPhone. Less than 10% of the components are actually designed and made in America. Most of the manufacturing occurs offshore, mainly in Asia. The same applies to semiconductor components, vital for a broad range of appliances from cars to washing machines. The value accrues less to the emerging economy and more to the multinational. Hence Apple’s gross profit margin has been between 30% and 40% for the last 15 years, while the margins for the local suppliers of components are a fraction of Apple’s. Companies will always try to find the lowest-cost suppliers to remain competitive. It’s been going on ever since East Anglia enjoyed an industrial revolution 3,500 years ago, exporting flints for spear and axe-manufacturing in Europe. 

Another problem for developing economies was that foreign companies would often crowd out local businesses due to their ability to raise capital and swallow start-up costs. That is why Africa has only a rudimentary car-manufacturing sector producing a mere handful of designs, while key components such as the engine are imported or made under licence. Until recently Asia (ex-Japan) had failed to create significant players in services such as advertising or to develop global drinks brands. In broadcasting and publishing, too, there have been few winners.

Where the value goes

The result has been that until recently, most emerging-market indices were dominated by local banks, property companies and utilities, where government tended to impose controls against foreign competition. Because local banking regulation and oversight were typically weak and capital flows erratic, emerging markets became as well known for their booms and busts as for their growth stories. 

Even in sectors where emerging markets have the edge, such as commodities or clothing manufacture (the starting point for the success stories of Singapore and Hong Kong), often the value-added is lost to the overseas operator or buyer. Swedish-based Hennes & Mauritz, for instance – better known as H&M – is a global success in selling clothes (and if you had invested 30 years ago you would have made 200 times your original investment). It owns no factories, but designs and then sources clothes from over 800 local production sites worldwide, many in developing countries. The gross profit margin in the four years to 2020 was a chunky 50%. The suppliers will have been negotiated down as much as possible; moreover, with so many sources H&M can change suppliers in the blink of an eye. Given Sweden has only 11 million people, it’s a remarkable story of a company turning its comparative disadvantage into success. But its shareholders have been the winners, not emerging-markets investors. 

In natural resources too, a disproportionate number of the winners have been foreign companies rather than local ones. Indonesia groans with copper and gold, but its largest mine is owned and operated by Freeport-McMoRan, based in Arizona. The largest global copper deposits are in Chile. Anglo-Australian BHP Billiton owns Chile’s – and the world’s – biggest copper mine, the Escondida project, in a joint venture with UK-based Rio Tinto and a Japanese consortium. 

An inferior index

The leading benchmark for developing economies is the MSCI Emerging Markets index, which reflects the performance of large and mid-cap companies in 27 nations. These markets are defined as “economies or countries where some sectors are rapidly expanding and engaging aggressively with global markets”. Sounds pretty woolly? It is. The index is dominated by three countries: China (comprising almost 40%), then Taiwan and South Korea (27% combined). Some countries, such as Singapore and Hong Kong, are absent because they have achieved developed-market status, and the index does not cover “frontier markets” (the poorest economies), which have their own index. China as an emerging market is an anomaly as it is the world’s second-largest economy. Its dominance of the benchmark has resulted in many funds using indices with a lower China weighting, but as a result Taiwan and South Korea become even larger. Either way the index still makes little sense given that Taiwan has income-per-head substantially larger than the UK and South Korea about the same as the EU average. 

The definition of emerging markets, then, is now out-of-date and the term has become a pretext for marketing “exciting” products and earning high fees. Emerging-market funds tend to charge 50% more than others. As an investment category it’s not going away anytime soon, but the examples of companies making hay in these countries points to an often more successful and cheaper way to invest. 

Where investors should look 

Look at where a company makes its money, not where it is listed. Many firms listed in emerging markets make their profits selling overseas, so they are tied into the slow growth in mature economies – the opposite of what investors think they are buying. For the prime reason to invest in developing countries is to capture their high domestic economic growth. Therefore it is far more rational to invest in companies (wherever they are domiciled) that derive much of their sales and profits from emerging markets. 

There are many in the UK and other major markets, which have the added benefit of better corporate governance and less corruption. Moreover, returns are often better. Some of the best emerging-market companies are actually “at home”. There are some interesting growth stories at the smaller end of the UK market...

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Subscribers can see the whole article in the digital edition available here

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Events to Look Out for Next Week

The upcoming week is likely to see concerns about the ongoing pandemic but also on the still elevated inflation pressures as the economy continues to boom. Focus turns on the Fed minutes and RBA which is set to review its current policy settings next week, while in Europe the Commission will release its Economic Growth Forecasts and the ECB will hold a Special Strategy Meeting. From a data perspective, the week after the NFP report is typically one of the lightest of the month and next week is no exception.

Monday – 05 July 2021

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• United States – Independence Day
• Retail Sales (AUD, GMT 01:30) – Australian final Retail Sales for May expected to confirm at 0.1% m/m.
• UK Services PMI (GBP, GMT 08:30) –  The June services is expected lower after it was upwardly revised to 62.9 in May and the composite at 62.0 from 62.9. Still strong readings that signal very robust expansion, although the government’s decision to delay the full lifting of lockdown measures and continue to restrict foreign travel seems to have left its mark.

Tuesday – 06 July 2021

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• Event of the week – Interest rate Decision (AUD, GMT 04:30) – No changes are expected from RBA to the 0.10% OCR, especially after the stellar May jobs data that could push Governor Lowe not to extend the timeline of the bank’s yield control measures next month. Especially the drop in the jobless rate, which came despite a parting back of official employment support measures suggests that the recovery is strengthening. RBA governor Lowe will also participate in a panel discussion in Sydney where market participants will watch for clues on the policy outlook.
• European Commission releases Economic Growth Forecasts (EUR, GMT 09:00)
• Retail Sales and ZEW (EUR, GMT 09:00) – 4.4% May retail sales gains are expected for the Eurozone, following the contraction by 3.1%, while June German ZEW investor confidence should dipped to 75.4 from 79.8.
• ISM Non-Manufacturing PMI  (USD, GMT 14:00) – The ISM-NMI is anticipated to fall to 63.0 from 64.0 in May, 62.7 in April, and 63.7 in March, leaving the four highest readings in history.

Wednesday – 07  July 2021

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• JOLTS Job Openings (USD, GMT 14:00) – JOLTS define Job Openings as all positions that have not been filled on the last business day of the month. May’s JOLTS job openings is expected to fall slightly at 8.300M, following the 9.286M in April.
• Ivey PMI (CAD, GMT 14:00) – A survey of purchasing managers, the Index provides an overview of the state of business conditions in the country.
• FOMC Meeting Minutes (USD, GMT 18:00) – The minutes could spark some light on the start and speed of the Fed’s tapering program.

Thursday – 08 July 2021

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• ECB Special Strategy Meeting – European Central Bank policymakers will hold a special meeting in Frankfurt in a bid to wrap up the institution’s strategy review. The gathering is expected to put the finishing touches on a new definition of price stability. The discussion, while not a formal monetary policy meeting, may also shape the ECB’s plans for when and how to exit the emergency measures it deployed during the pandemic. Its 1.85 trillion-euro ($2.19 trillion) bond-buying program is set to run at least until March 2022.

Friday – 09 July 2021

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• Consumer Price Index (CNY, GMT 01:30) – The June’s Chinese CPI is expected to grow to 1.6% from 1.3%  on a yearly basis.
• Industrial and Manufacturing Production (GBP, GMT 06:00) – Industrial Production is expected to have risen to 1.2% m/m, with the overal Manufacturing production is forecasted at 41.8% y/y in May from 39.7% y/y. both providing a growth at 1.2% m/m and 1.5% m/m in April.
• Unemployment Rate (CAD, GMT 12:30) – Employment in Canada has delined by  -68.0k in May following the -207.1k tumble in April, as the third wave of restrictions continued to weigh on the labour market.  The Canadian unemployment rate is expected to have remained stable at 8.2% in June as employment could fall by -20K.

Click here to access our Economic Calendar

Andria Pichidi 

Market Analyst

Disclaimer: This material is provided as a general marketing communication for information purposes only and does not constitute an independent investment research. Nothing in this communication contains, or should be considered as containing, an investment advice or an investment recommendation or a solicitation for the purpose of buying or selling of any financial instrument. All information provided is gathered from reputable sources and any information containing an indication of past performance is not a guarantee or reliable indicator of future performance. Users acknowledge that any investment in Leveraged Products is characterized by a certain degree of uncertainty and that any investment of this nature involves a high level of risk for which the users are solely responsible and liable. We assume no liability for any loss arising from any investment made based on the information provided in this communication. This communication must not be reproduced or further distributed without our prior written permission.

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NFP front and centre at the start of the new quarter!

The USD rallied, then fell following the jobs report, which saw NFP rise 850k versus consensus 700k. The average workweek slipped slightly, while hourly earnings were in-line, and the unemployment rate rose a tenth versus expectations for a decline. The trade deficit widened, but was in-line with expectations. USDJPY initially moved over 111.60 from 111.45, then pulled back to 111.30, while EURUSD fell to 1.1808 from 1.1825, then rallied over 1.1855. Equity futures continue to indicate a higher Wall Street open, while yields are a bit firmer.

Click here to access our Economic Calendar

Stuart Cowell

Head Market Analyst

Disclaimer: This material is provided as a general marketing communication for information purposes only and does not constitute an independent investment research. Nothing in this communication contains, or should be considered as containing, an investment advice or an investment recommendation or a solicitation for the purpose of buying or selling of any financial instrument. All information provided is gathered from reputable sources and any information containing an indication of past performance is not a guarantee or reliable indicator of future performance. Users acknowledge that any investment in Leveraged Products is characterized by a certain degree of uncertainty and that any investment of this nature involves a high level of risk for which the users are solely responsible and liable. We assume no liability for any loss arising from any investment made based on the information provided in this communication. This communication must not be reproduced or further distributed without our prior written permission.

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Cryptocurrency roundup: Binance “ban” and a bitcoin ETF

The last week was busy for crypto markets with a regulatory crackdown by the FCA dominating headlines.

Here are some of the top stories that caught our eye.

The FCA “bans” Binance

Binance, the world’s largest cryptocurrency exchange, came under fire from the UK’s Financial Conduct Authority last week when it said the company is not authorised to carry out any regulated activity in the UK.

The move is the latest measure by a regulator aimed at suppressing digital currencies, which have been growing at breakneck speed.

The FCA’s latest action against Binance will force it to display a warning on its website – effective from 30 June – telling investors that it doesn’t have permission to operate in the UK.

The FCA doesn’t regulate cryptocurrencies themselves, but it does regulate derivatives – eg, futures contracts, contracts for difference (CFDs) and options – as well as crypto assets that it considers to be securities.

But in October last year, the FCA said it would ban the sale, marketing and distribution to all consumers of any derivatives (ie, CFDs, options and futures) and exchange-traded notes that reference unregulated transferable crypto-assets by firms acting in or from the UK.

The FCA said its decision was prompted by the high risks and extreme volatility posed by underlying assets to retail investors.

So the announcement enforces an existing ban and isn’t exactly new.

But the higher levels of due diligence may be positive for the space. “Investors see the crackdown as a sign that the crypto markets are maturing, and that the company will have to accelerate its process of becoming a regulated exchange, which will likely lead to increased trust among crypto traders,” says Naeem Aslam, chief market analyst at Avatrade.

Cathie Wood’s ARK Invest launches a new bitcoin ETF

Cathie Wood, the veteran fund manager behind ARK Invest, is launching a bitcoin ETF – the ARK 21Shares Bitcoin ETF – in partnership with Switzerland-based 21Shares.

The ARK 21Shares Bitcoin ETF’s objective is to “track the performance of bitcoin, as measured by the performance of the S&P Bitcoin Index”, says a filing with the Securities and Exchange Commission (SEC), the US regulator.

Until now, ARK has been piling into companies with heavy exposure to digital currencies, including the likes of Coinbase Global and Grayscale Bitcoin Trust. But launching a crypto ETF is big news even for a prominent crypto-bull like Wood.

The ARK ETF is still pending approval from the SEC, so the fund may not launch for some time yet. But it’s not the only one in the pipeline. As Bloomberg points out, 14 cryptocurrency ETFs are currently awaiting approval from the SEC.

How the SEC treats crypto ETFs may ultimately determine whether the FCA approves crypto ETFs. As it stands, they are currently banned in the UK.

Bitcoin billionaire dies leaving behind a fortune

Mircea Popescu, a bitcoin billionaire and blogger, is reported to have drowned off the coast of Costa Rica.

The billionaire is rumoured to have held more than $1bn in bitcoin. The crypto world is speculating on what happens to the fortune following Popescu’s death.

This is not exactly the first time large swathes of cryptocurrencies are locked following the death of its owner. In 2019, the death of Geald Cotten, the founder of Canada’s largest crypto exchange, also led to more than $135m worth cryptocurrencies being displaced as only Cotten knew the private keys to the wallet.

Popescu’s death is perhaps the latest reflection of the vulnerabilities in holding cryptocurrencies and the risks posed if details to a private key get lost.

Crypto markets update

Here’s what happened in the crypto market over the last seven days:

• Bitcoin fell 1% to $33,189.
• Ether rose 9% to $2,051
• Dogecoin fell 3% to $0.24
• Cardano fell 3% to $1.30
• Binance coin fell 3% to $279

What investors need to watch out for next week

The price of ether

In July, the ether network is getting a makeover, effectively a hard fork update that aims to address the problem of high gas fees (transaction fees). Prices could remain volatile in the run up to the update.

Is altcoins’ bull run over?

Growth in altcoins – cryptocurrencies other than bitcoin – may have matured according to a metric called the Altcoin Season Index (ASI). It is worth keeping an eye on the index, which tracks the performance of the best performing 50 altcoins relative to bitcoin. It shows bitcoin is outperforming the cumulative price movement of the 50 altcoins, meaning “altcoin season” may be over.

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Record M&A activity is usually a toppy sign – what does it mean today?

• SEE MORE Too embarrassed to ask: what is private equity?
• SEE MORE Private equity isn’t evil, it’s just doing what traditional investors should be doing

We’ve seen so many “top of the market” indicators in recent years, none of which have actually proved to be the “top of the market”.

So I’m wary of attaching too much importance to yet another one.

But news that merger and acquisitions activity – driven to a great extent by private equity deals – has hit an all-time high is certainly worth looking at in a bit more detail.

After all, the last time we were at these sorts of rarified heights, it was 2007. And we all know what happened then.

Private equity deals have hit a new record

Private equity has been in the news a lot recently, and there’s no sign of this changing soon.

Global mergers and acquisitions (M&A) activity hit an all-time high this quarter, helped along by record-breaking activity from private-equity companies. The total value of deals hit $1.5trn in the second three months of 2021. That’s the fourth quarter in a row of £1trn-plus volumes, notes the Financial Times.

Focusing on private equity, the first half of this year was the busiest for the sector since records began 40 years ago, according to data provider Refinitiv, with nearly 6,300 deals.

Record M&A activity does tend to go hand-in-hand with toppy markets. Why is that, and does that mean this is a warning sign? Let’s think it through.

A market in which a lot of deals are being done has a number of characteristics. All of these help to explain why the more frenetic the activity, the closer to the top we tend to be.

If a lot of deals are being done, it means there’s a lot of money looking for a home. In turn, that means there’s a lot of competition for deals. In turn, that means desirable assets are going to go for a lot more than they would in a duller market.

As a result, you get a “reach for yield”. Investors make steadily more optimistic assumptions to justify putting their money to work. Eventually those assumptions reach the point where they’re just plain over-optimistic.

It’s basically your classic bubble behaviour. A combination of loose money and an influx of new investors (private equity has drawn a lot of new institutional money over the years as many of the best companies have been remaining in private hands for longer) drive enthusiasm for a sector.

Said enthusiasm drives up the valuations in the sector until they are just too far away from reality to be sustainable. Something happens – usually the money becomes a bit less available than it was the day before, either because central banks tighten and then a big player goes belly up – and the bubble pops.

So where are we now?

Wherever we are in this cycle, it’s fair to say that we’re closer to the end than to the beginning. As Lex in the FT notes, private equity deals in the US were being done at a median average 14.7 times enterprise value (EV) to ebitda multiple (that’s a fancy price/earnings ratio basically). That’s very, very expensive by historic standards. In 2019, it was 11.5 according to PitchBook, and that was a record high.

Meanwhile, returns to investors have been declining, adds Lex. About 20 years ago, private equity was beating public markets in terms of returns. Now it’s about the same and sometimes a little lower. That shows you that valuation is becoming an issue.

There’s another interesting data point. Amid the last big private equity boom, US giant Blackstone went public. That was in June 2007, which was pretty much the top of the market.

Right now, the next IPO that everyone’s getting excited about in the London market happens to be private equity group Bridgepoint. Now, Bridgepoint is much smaller than Blackstone, but the point is not the size – it’s the idea that now is a good time to go public (in other words, now is a good time to sell up while you can).

What’s the counterargument? Well, it’s hard to see debt getting a lot more expensive in the near future (though even a small shift matters when markets are this overstretched). Also, if you adjust for inflation, we aren’t quite at the highest levels ever seen (that happened in 2000) although I’m not sure inflation is all that relevant in this context.

Finally, I suppose the pandemic may well have artificially boosted the figures in the same way that it’s juiced global housing markets. This is probably the best counterargument, although it just points to a longer period of time before we top out – it doesn’t take away from the fact that activity is still overheated.

Anyway, I can’t honestly say if we’re near a top or not – my crystal ball conked out a while ago. But this is certainly not the sort of activity you see near a bottom.

I’m not saying you should be pulling money out of the market or even making any big adjustments to your asset allocation. Just stick to your plan, and try to stick to the cheaper markets. Private equity is mostly a “growth” rather than a “value” phenomenon, so it’s all part of that “jam tomorrow” bubble in some ways.

Oh and if you’re looking for value and investment ideas, make sure you listen to our latest podcast, out today. Merryn catches up with MoneyWeek favourite, Jim Mellon, who shares his views on markets (and banks in particular), gives us his punchy predictions for the future of agriculture, and explains why Dubai could be the “new Hong Kong” – have a listen here.

Until tomorrow,

John Stepek

Executive editor, MoneyWeek

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Market Spotlight: Trading The June NFP

US Payrolls In FocusThe latest set of US labour reports is due today and, on the back of the hawkish June FOMC meeting, the release is attracting even more attention than usual. The market is looking for a 700k reading today, on the back of the prior month’s 559k reading. Along with this, the market is looking for the unemployment rate to fall back from 5.8% to 5.6% along with average hourly earnings ticking down to 0.4% from 0.5% prior.With the USD back in favour, the key thing today is that the market isn’t left disappointed. USD bulls won’t need to see a bumper release to keep buying, just no red on the data sheet. There has been quite a lot of volatility in NFP readings this year, which raises risks. However, given the broader reopening underway over June, the consensus feels likely to be met, which should keep the current USD rally ongoing into next week.Where to Trade the NFP?With NZDUSD not down as far as the Aussie, but with the retail community growing its long position now, there is room for the pair to push lower. A strong release today should weigh sharply on NZD. The pair is currently sitting just above the .6933 support. With MACD and RSI both bearish, a break below there will open the way for a move down to the .6791 level next.

from Tickmill Expert Blog - Forex Traders Blog https://www.tickmill.com/blog/market-spotlight-trading-the-june-nfp"
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Riksbank Dovish, USDSEK Strengthens

USDSEK, Daily

The Swedish krona weakened against the Greenback after Sweden’s central bank said it would leave interest rates unchanged until the third quarter of 2024. Interest rates are currently at 0.00%. The Riksbank also pledged to cut its repo rate, if related data show a weakening outlook for inflation.

This dovish scenario leaves USDSEK with room to the upside, especially if the NFP jobs report produces a strong figure. A better-than-expected Non-Farm Payrolls report would bring the possibility of the Fed’s rate-cut schedule closer. The Fed already has a dot plot-based forecast for a rate hike in 2023.

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Technical Levels

USDSEK has scored 5 consecutive days of gains after Riksbank maintained its dovish stance yesterday. This was reinforced by the break of the 8.5056 technical level in the previous 2 weeks.

USDSEK, H4.

Further strengthening should be able to break the 8.6395 minor resistance to target FE61.8 (+/-8.7000) or 8.7636 peak. A break of the 8.7636 peak would have implications for the 38.2% retracement around 9.0000 from the draw of the March 2020 peak and January 2021 low. This scenario would likely fail if the 8.7636 resistance holds, and if this is the case then the consolidation will return to the downside and the decline from the March 2020 peak will resume its course. The closest support seen today is at 8.4425. A price move below this level will target another level of support.

Technically, the temporary bullish support is validated, with the moving average above Kumo and AO, which are in the buy zone.

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Ady Phangestu

Analyst – HF Indonesia

Disclaimer: This material is provided as a general marketing communication for information purposes only and does not constitute an independent investment research. Nothing in this communication contains, or should be considered as containing, an investment advice or an investment recommendation or a solicitation for the purpose of buying or selling of any financial instrument. All information provided is gathered from reputable sources and any information containing an indication of past performance is not a guarantee or reliable indicator of future performance. Users acknowledge that any investment in Leveraged Products is characterized by a certain degree of uncertainty and that any investment of this nature involves a high level of risk for which the users are solely responsible and liable. We assume no liability for any loss arising from any investment made based on the information provided in this communication. This communication must not be reproduced or further distributed without our prior written permission.

from HF Analysis /249582/
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BTCUSD approaching support, potential for further drop

BTCUSD is approaching horizontal overlap support level in line with 61.8% Fibonacci retracement and 78.6% Fibonacci extension. Beyond support level, prices might continue to push down towards horizontal swing low support in line with 127.2% Fibonacci extension and 161.8% Fibonacci retracement. EMA is also above prices, showing a bearish pressure for prices. If prices bounces from the support level, prices might push up towards horizontal overlap resistance in line with 50% Fibonacci retracement and 50% Fibonacci extension

from Tickmill Expert Blog - Forex Traders Blog https://www.tickmill.com/blog/btcusd-approaching-support-potential-for-further-drop"
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EURUSD H4 is at pivot, potential for bounce

EURUSD H4 is at pivot, in-line with -27.2% Fibonacci retracement and 200% Fibonacci extension where we may potentially see a bounce towards the 1st resistance, in-line with 38.2% Fibonacci retracement and 100% Fibonacci extension. If price break below the pivot, we may see it swing towards 1st support, in line with -61.8% Fibonacci retracement and 161.8% Fibonacci extension

from Tickmill Expert Blog - Forex Traders Blog https://www.tickmill.com/blog/eurusd-h4-is-at-pivot-potential-for-bounce"
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DAX H4 is approaching pivot, potential for drop

DAX H4 is approaching pivot where we have 78.6% Fibonacci extension and descending trendline resistance. We may potentially see a drop towards the 1st support level, in-line with 50% Fibonacci retracement and 127.2% Fibonacci extension. If price bounce from the pivot, we may see it swing towards 1st resistance, in line with 100% and 127.2% Fibonacci extension

from Tickmill Expert Blog - Forex Traders Blog https://www.tickmill.com/blog/dax-h4-is-approaching-pivot-potential-for-drop"
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NIKKEI facing bearish pressure below key resistance area

Nikkei pushed higher, approaching key Fibonacci confluence zone at our Pivot, where we have 61.8% Fibonacci retracement and 100% Fibonacci extension. A short term intraday drop towards graphical swing low support and 1st support could be possible. Stochastic indicator is testing resistance where price dropped in the past as well.

from Tickmill Expert Blog - Forex Traders Blog https://www.tickmill.com/blog/nikkei-facing-bearish-pressure-below-key-resistance-area"
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FOMO Friday: AUDUSD Leads The Charge Lower

AUDUSD Breaks LowerAs the week draws to a close the big winner has been the US Dollar. However, in the FX game, where there is a winner there is also, always, a loser. This week the weakest currency has been the Aussie with AUDUSD falling around 150 pips (2%). So, talking with other traders this week, there are plenty of people who were in on the move but, as is always the case, those who missed out on the move seem to be the most concerned with it. So, let’s walk through what happened and why this was a great trade.What Caused the Move?On the Aussie side of the trade, the main driver this week was news of fresh lockdowns in Australia. With the Delta variant increasing there, the Australian government as announced fresh stay-at-home measures, which now include four of the country’s capital cities and three other regions, affecting around 12 million people.Given the economic toll of these lockdowns, the news has been met with heavy selling in the Aussie. This is mainly because traders now expect a less optimistic message from the RBA next week. While the RBA has been keen to stress caution in its outlook anyway, citing the residual downside risks around the pandemic, news of these lockdowns means the bank’s message is likely to be even more reserved, dampening any chance of an Aussie recovery in the near term.In terms of US action, the Dollar has been surging higher following the June FOMC meeting. With 13 of the bank’s policymakers now projecting a rate hike as early as 2023, and with growth and inflation forecasts for the year ahead raised, the market is now focusing on tapering once again. The prospect of tightening this year has caused a sharp unwinding of USD positions which is driving the current USD rally. Given the policy divergence, or at least, divergence in policy expectations, between the Fed and RBA, the pair looks poised for further downside. Let’s take a look at the technical picture.Technical ViewsAUDUSDThe breakdown below the rising trend line in AUDUSD has seen the pair passing below seral key levels. With the pair having now broken below last week’s lows, and with MACD and RSI both turned lower, the pair is on course to test the .7413 level next.

from Tickmill Expert Blog - Forex Traders Blog https://www.tickmill.com/blog/fomo-friday-audusd-leads-the-charge-lower"
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