Mixed messages from the Fed as the retail army rears its head once more

If there is one unifying theme in financial markets today, it is the boost to disruptive forces in the market. Two of the retail traders’ favourites are higher again today including GameStop, which is up more than 12% in the last 24 hours after a spike in its share price that started yesterday afternoon. After the buying frenzy for GameStop and the other retail meme favourite AMC earlier this year, volatility in these stocks has fallen since peaking in February. However, with both GameStop and AMC experiencing double-digit gains in the last 24 hours and a notable increase in social media interest in these stocks, the market is starting to wonder if the buying frenzy for some obscure areas of the US stock market is back in focus. 

Is the retail trader army back in force? 

Added to the renewed interest and rising volatility in GameStop, bitcoin is also a top performer this week. It is currently up nearly 2% at the start of trading and is up more than $8,000 so far this week, although it experienced some selling interest late on Tuesday as it approached $40,000. There is no single piece of news or driver for this move, instead we think that it is a confluence of factors including confused messages from the Fed that drives interest into crypto, low volatility elsewhere, especially in the more conventional G10 space, and also large institutional players who are willing to buy the dip whenever the benchmark crypto currency swoons. However, the gains are also noticeable across the crypto eco-system including Ethereum, which is up more than 2% today and has been noticeably less volatile than Bitcoin in the last week. Coinbase Global, the crypto trading platform, has also climbed this week in line with Bitcoin’s recovery in recent days. 

What next for crypto 

Overall, when it comes to crypto, I have both long- and short-term views, however, my overarching view is that crypto is here to stay, that the eco-system will only get bigger, and that those big investors or banks who deride bitcoin are not to be trusted – they could be buying when they say they are selling and vice versa. Thus, I prefer to take it slowly. In the short term be careful if you buy any crypto on margin, buy on the dip and keep your profit targets short. In the longer term, I think that Elon Musk’s concern about crypto’s environmental impact will be important for the type of crypto currencies that overtake Bitcoin in the future. Bitcoin may be the biggest crypto currency out there and it may be considered the benchmark today, but it won’t be in the future. In fact, we believe that it could be thought of in the same way as oil companies in a few years, or even months’ time. However, there are less energy intensive crypto currencies out there such as Cardano, which is the fourth largest crypto currency by market capitalisation. Rather than relying on a proof of work system, it relies on a proof of stake system and has a network of validators. This is the “green” alternative to Bitcoin and expect to hear more hype around this crypto currency in the coming months. 

The Fed’s mixed messages leaves markets guessing 

In the conventional space, the Fed has been sending mixed messages. On the one hand, multiple Fed officials have come out and said that tapering and an end to extraordinary monetary policy support is going to come to an end – no surprise there – but on the other hand, other Fed officials have pushed back on inflationary fears in the marketplace. There is a yin/yang energy to financial markets right now, and we think that this is down to the Fed. Although it’s obvious that the US and other economies are surging as the reopening of economies after Covid lockdowns powers ahead, we expect that the Fed will react differently to inflation this time around. For example, it is likely to leave the punchbowl out much longer than expected. The result of this move, is that taper talk has less of an impact on the markets. For example, Treasury yields are barely budging, and the 5-year Treasury yield, which is closely linked to interest rate expectations, has trended lower in the second half of May and is currently trading at 0.77%. The dollar index continues to struggle to gain upward momentum, it is currently up 0.1%, which is in stark contrast to its crypto peers. However, the Nasdaq is higher for three days and it is currently the best performing US index on Wednesday. Tech stocks should do well in an environment where interest rates remain low and where tech giants with billions of dollars’ of spare cash on their balance sheets are on a spending spree, Amazon announced that it was buying MGM studios for a cool $8.45 bn on Wednesday, its share price is up nearly 1% so far on Wednesday. We remain optimistic on the outlook for Amazon, especially if it continues to deploy its cash pile to diversify its operations. 

Oil industry’s shift to greener pastures 

Shell’s share price reversed some losses in the middle of the day as news broke that a Dutch court had found Shell guilty of polluting the earth in a case taken against the oil major by a group of environmentalists. The Dutch court ordered Shell to cut their emissions by 45%, which, if enacted, could see a dramatic shift in their primary operations. This comes at a time when the IEA has said that the oil industry needs to stop drilling for new wells by 2025 in order to meet global emission reduction targets. The tide is invariably going out for the oil majors, those who adjust to a green future will survive. While Shell’s share price recovered from earlier losses on Wednesday, and the oil price remains close to its highs of the year at $68.70, we still think that the best performing oil major in the second half of this year could be BP due to its cheap valuation and the fact that its board and executive team are committed to allocating serious amounts of capital on its green business. This will pay off with a higher stock price, in our view. 

Why Nasdaq is king of the indices once again 

Our trade to watch for rest of week is the Nasdaq. With Treasury yields going nowhere and confused messages from the Fed, we prefer trading indices, and the environment looks good for a fresh record high in the Nasdaq, in our view. If the index can break short term resistance at 13,750 then it opens the way to 14,000 and then record highs around 14,100.