Market Watch 15.02.2021

1. The strained EU-Russia relations. The relations between the EU and Russia have been under pressure since the Cold War; however, the two entities' leaders always found the correct ways to solve the issues and work together. The new "conflict" among these two arose due to Alexei Navalny's arrest, a strong critic of Russian President Vladimir Putin. The EU's foreign policy chief, Josep Borrell, visited Moscow for a discussion about the situation. Still, the other party did not show the desire for cooperation, the visit being described as a "humiliating" trip for the EU. Simultaneously, three diplomats from Germany, Poland, and Sweden have been expelled without Josef Borrell knowing that. In this context, the EU is thinking to consider imposing travel bans and asset freezes on allies of Russian President Vladimir Putin, starting with this month. As a counter-argument to the possible sanctions, Russia affirmed that it is ready to cut ties with the European Union if new economic sanctions are applied; "We proceed from the fact that we are ready (for that). In the event that we again see sanctions imposed in some sectors that create risks for our economy, including in the most sensitive spheres," said Russia's Foreign Affairs Minister Sergey Lavrov. Let's see if the EU takes action against these injustices taking into account the economic relations that must end between them, such as the gas pipeline project from Russia to Germany, Nord Stream 2.



2. Bitcoin as an asset class. After bitcoin became the spotlight of many investors, the Wall Street banks face constraints to accept bitcoin as a legitimate asset class. The concerns regarding this issue are arising inside the big banks such as JPMorgan or Goldman Sachs. Daniel Pinto, JPMorgan co-president, has been answering these worries by saying that he is open-minded about bitcoin, but its introduction has not yet been announced. However, the investment bank cannot pronounce without considering if the majority of clients want the firm to trade bitcoin. If different managers and investors will use bitcoin, the bank will get involved as well. Goldman Sachs is also thinking of introducing bitcoin as an asset last week, holding a private meeting with Mike Novogratz, the crypto firm Galaxy Digital CEO, only for its employees. Nothing is settled; however, bitcoin's worth is increasing; two months ago was traded for $20,000 and last week for more than $48,000, forcing the banks, corporations, and fintech competitors to take a step ahead before being left behind. In case one of the biggest world banks will decide to accept bitcoin, it would be a significant step of legitimacy for the respective asset class.



3. U.K.'s economy. Last year, the U.K. economy declined in national output by 9.9%, being the largest contraction since the Great Frost of 1709, as one of the pandemic's primary outcomes. Compared with other financial crises, such as the one in 2009 or 1971, the annual contraction registered the worst value last year. The prediction for 2020 was around 8%, but due to the virus's new mutation, the country stays in lockdown without an ending date. Last week, more than 4 million cases of Covid-19 and 115,00 deaths and only 13 million people had revived the first dose of the vaccine. Looking at other economic sectors, the services grew in December by 1.7% after contracting by 3.1% in November, while the manufacturing is increasing month by month since May. The monthly GDP grew by 1.2% in December compared with the previous months, but it is still below 6.3% compared to February 2020. "The tighter restrictions imposed towards the end of last year, which are likely to remain in place for much of the current quarter, suggest that the economy may shrink again," said Dean Turner, an economist at UBS Global Wealth Management.



4. Trump found it unguilty for the Capitol riot. After the U.S. Capital riot on 6th of January, when five people had died, including a police officer, former President Donal Trump participated in different trials for escaping the accusations. Last Saturday, the Senate decided to absolve him from any sanctions in a 57-43 vote on the respective motion. For the Democrats to win the trial, they needed 17 Republicans to join, but only seven GOP Senators voted against Donald Trump. The Democrats accused Trump of being responsible for the riots, bringing new evidence, video, and audio, for proving the facts. Trump's lawyers came prepared and argued that the First Amendment protected the former President and the current trial was unconstitutional since Donald Trump became an ordinary citizen. The House impeached Trump while he was still considered the U.S. President, but they did not want to start the trial before the inauguration of Joe Biden, arguing it was not enough time. Trump became the first president in U.S. history who has been impeached and tried twice and no Senate trial has ever been held for a former president. In his first impeachment trial, he has been accused of abuse of power and obstruction of Congress because he was pressuring Ukraine to investigate Joe Biden and his son.



5. The Fed's strategy. The biggest economy in the world is also under the pressure of the pandemic. The new $1.9tn stimulus plan proposed by the Biden administration is unclear if it is sufficient to raise the economy and unleash inflation, forcing the Fed to use its loose monetary policies sooner than expected. The Chair of Fed, Jerome Powell, announced last week that the Fed needs to maintain a "patiently accommodative" policy stance until the economy hits "full employment" and inflation rises above 2% for a period. He does not see that happening relatively soon, but the implementation of the vaccine across the U.S. might speed the process of economic recovery. Meanwhile, the Fed is testing the bank's capabilities to resist a 55% fall in equity prices. The U.S. banks will have to prove they can hold out against the U.S. stock markets declined by 55%, besides the paraments for annual stress tests that decide how much banks can payout to their investors. The fall in equity prices might reduce the worth of the trading assets banks have and have repercussions as big waves in prices lead to higher capital requests. Even if the pandemic did hit their profits as bad as expected, some banks, including JPMorgan and Morgan Stanley have not met their duties of returning the cash to their shareholders.

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