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There are several fundamental pressures causing volatility in the price of Oil and the price of related equities. The price of WTI, Brent, Heating Oil and stocks in Oil and Gas companies are worth keeping an eye on over the coming weeks. For traders, CFD or otherwise, the volatility is a time of many opportunities.

One day the price of a barrel of Crude Oil is up 2.2%; the next, it is down 4.2%, like that which occurred with WTI from Monday to Wednesday last week. The price movements are dependent on the news of the day and the associated media coverage, and the mood of investors and thier tolerance for uncertainty.

The price of Oil instruments illustrated

oil instruments

Fundamental pressures:

OPEC+ meetings affecting the price of Oil

For two weeks, OPEC+ members have failed to agree on the production output for the second half of 2021 and the following year.

The disharmony among the OPEC+ members has, naturally, resulted in volatility in the Oil market. At one point, as OPEC+ concluded a Thursday meeting without reaching an agreement to increase production output, the per barrel price of WTI and Brent Oil traded at more than US$75. 

The OPEC+ stalemate has affected the price of Oil both positively and negatively. As tensions continued among OPEC+ members and meetings were cancelled in frustration, the price of Oil began moving the opposite way. Evidently, Oil traders lost patience in the face of continued uncertainty. Between Wednesday and Thursday last week, Oil fell to 2-week lows, losing 1.8%. 

As it stands, no deal to boost output has been achieved by OPEC+, and meetings have been put on hold. 

Open for business?

Part of the reason that OPEC+ is having trouble forming a consensus is because predicting Oil demand is currently an extra complicated exercise. 

Overall, demand for Oil is expected to lift in the latter half of 2021, but by how much is a more difficult question. Further complicating the issue is how significant economies around the world are reacting differently to the new Delta Covid-Variant. Each nation is weighing factors such as its vaccination rates and its people's lockdown exhaustion.

The Delta variant has had little trouble spreading across the world from its origin in India. Some countries are planning on treating it as a mild inconvenience. For example, the UK intends to live with the virus as best they can while shelving lockdown measures. Other countries are implementing or extending lockdown orders to limit the variant's spread. Australia and Japan are in this group of nations. Japan has now banned spectators from attending its Tokyo Olympics games (yet not cancelling the games altogether). While the former is discussing the possibility of extending the lockdown in its largest city, Sydney, once again.

IPO's – Hot or not?

"Initial Public Offerings" – or IPO for short, have been the most popular way for businesses to raise capital for their business. However, as of late, they have been used as an exit strategy for early venture capital investors. The question becomes – should you spend your hard-earned money on stocks that have recently IPO'd?

The purpose of an IPO have changed – however; you'll have to read between the lines to see it

Bill Gates, the founder of Microsoft, is one of the wealthiest people in the world. However, his IPO did not immediately send him into the stratospheric amounts of wealth he has today.
Microsoft took one round of venture capital funding and stated that they did not need the money – they wanted the investors. Come IPO, Bill Gates, Paul Allen, Steve Balmer, and the Venture Capitalist, David F Marquardt, sold 17% of their shares on the open market. They raised over USD 61 Million (Around $140 Million in 2020) for the company, and the company was worth around $780 Million. Since its IPO, Microsoft has never had an unprofitable quarter.

Contrast this with Lyft, whose initial public offering netted the company $2.34 Billion (yes, with a B), giving the ride-sharing company a valuation of $25 Billion. This was after being funded by over 72 VC Firms. The founder, John Zimmer, was an instant billionaire at the time. However, the S-1, a pre-IPO document that was filed, warned this as one of the key risks:

Around 18 months after their IPO and Lyft has yet to make a profit. From its IPO date to the start of 2020, shares were down approximately 44% from its IPO price.

Clearly, there are differences between the two IPO's. Microsoft was profitable and did not need the money to continue. Lyft was and still is not beneficial and needed the money to continue.

Given the fundamental reason for an IPO is to raise capital for the business, it wouldn't be wrong to assume Microsoft's IPO shouldn't have happened, and Lyft's IPO was warranted. However, Bill Gates did not want to IPO. He hated the idea of the IPO, stating that "the whole process looked like a pain" and that it's an "ongoing pain once you're public.".

Bill Gates, co founder, chairman and CEO of Microsoft in 1995: "hate the whole thing. All I’m thinking and dreaming about is selling software, not stock"

John Zimmer had no such quarrels. This begs the question, what is the real reason investors want to IPO?

Don't get me wrong. I'm not saying that realizing wealth through an IPO isn't a valid reason for doing one. However, it may be a sign for investors on the secondary market like you and me that the company's leadership and initial values may not have the same outlook for the company as me and you. They get rich on IPO. You buying their shares makes them rich.

IPO Price? You can forget it.

DoorDash' IPO Price of $102 does not even register as a price ever available on the secondary market

Today, Doordash, a business that delivers food similar to Uber Eats, IPO'd for $102. However, the price available to investors on the secondary market were upwards in the range of $180. We see these initial spikes just after the IPO on most IPO's these days. This begs the question, will the strategy "Buy at the IPO price then sell straight after" work?

Yes – however, you can forget trying to get the stock at the IPO price. Long story short, shares allocated at IPO are earmarked for early investors, and the investment banks underwriting the public offering. Chances are, you will get the IPO at the price once it has already spiked.

Not all unprofitable companies get the green light for the IPO

wework IPO did not work

One of the most spectacular IPO failures in the past couple of years was the office-sharing company WeWork. I recommend reading this article on Bloomberg Businessweek on why it failed. However, a quick summary is as follows

Microwave Schematic, or "The We Company's" corporate structure?

And many more. This may have been a spectacular failure with regards to WeWork eyeing out a $47 Billion valuation. However, this was a massive success regarding the market identifying what companies should and should not be in public investors' hands.

Not all IPO's are with unprofitable companies

A recent highlight in the IPO world was a company we all came to love during the lockdown. Zoom Video Communications generated a Net Profit before its IPO, indicating the company was in good standing before releasing their shares to the world.

IPO's can be lucrative for investors who are in before the hype. Chances are, once you think about investing in an IPO, it's too late. However, you may find the gem in the rough, such as Zoom or Beyond Meat, which continue to prosper post IPO. So IPO's. Hot or not? Let's say they're lukewarm.

GBPUSD reaches 12-month highs

The Cable rallied to 1.3497, the highest it has been since 2019. This is shy of that healthy psychological resistance level of 1.35. Strong dollar weakness, alongside risk on consensus, has compounded to push the pound higher.

GBPUSD eyeing out for that 1.45 level

GBPUSD pricing in Brexit

Furthermore, with Brexit negotiations in full swing, there is hope that a deal will occur before year-end, which has also contributed to the stronger pound. An ambassador who takes part in the Brexit negotiations stated that agreement might occur before the end of the week (Source: BBC); however, warns that the deal “could all still fall apart.”

With that said, Jeremy Stretch, a currency strategist at CIBC stated that the market had priced a trade deal to come soon. “Although the markets have priced in a deal by the end of the week, we think this is a tad optimistic.”

We recently talked about a possible GBP/USD target of 1.45, which are Pre-Brexit lows. In short, the target requires that a) Brexit Negotiations are completed, and the breakup errs on the positive side and b) the Coronavirus situation not just in the U.K., but around the world subsides.  This is an overly optimistic scenario – one that will poise the U.K.’s financial markets for a robust recovery. This scenario is required to support Goldman Sachs’ buy recommendation for the United Kingdom.

U.S Dollar weakness pushing GBPUSD higher

However, the most significant tailwind for the pair may not be due to the U.K.’s strength – it is most likely going to be due to U.S. Dollar weakness.

The Coronavirus situation in the United States has not improved over the course of the year. The United States has been printing near 200,000 daily new cases for the past couple of days, with 3,100 deaths today – a grim new record.  Stretch voices this opinion, stating that the recent really in the pound was “largely a function of dollar weakness.”

The U.K. is not entirely out of the woods just yet. Even if Brexit negotiations are positive, Coronavirus continues to ravage the country. Cases have come down from all-time highs on lockdowns the government implemented. However, there is a chance they blow this gain when lockdown restrictions are lifted near Christmas.

Stocks reach all-time highs

Stocks reach all-time highs on vaccine optimism. The NASDAQ 100 and the S&P 500 are up 1.75% and 1.39%, respectively, with financials, utilities, and communication services being the largest gainers. The Dow Jones is also up around 1$ - however, still below that 30,000 mark. Across the ditch, cyclical in the UK was getting a bid, up around 2% after Goldman Sachs called the UK a buy.

NASDAQ AND S&P 500 break all-time highs

Stocks craving a vaccine

Pfizer is stated to have shipped their “first mass air shipment” of their Coronavirus vaccine. United Airlines carried Pfizer’s Coronavirus Vaccine from Brussels to Chicago O’ Hare international airport on Friday. Therefore, some Americans could get their first dose of the vaccine in a few weeks if the US DFA approves the vaccine without any hiccups. As stocks advance, we saw further dollar weakness, with the DXY down nearly 0.6%.

With the great bounce back from equities, some analysts warn that it will not be like this for the foreseeable future. Yuko Takano, equities portfolio manager at Newton Investment Management, stated that investors should not expect gains “in a straight line from here” and that “even if Covid-19 vaccines are approved swiftly, governments still face the tasks of administering the jabs… [with the] winter [coming], it ‘s getting cold so we’re going to see an ugly next wave of the virus hitting a lot of developed countries.”

Stocks may fall on a third wave

This is true, especially with Christmas coming up; some countries, especially in Europe, want to ease up restrictions to give some reprieve for businesses. In England, the government is allowing shops to stay open for 24 hours a day in the run-up to Christmas and in Jan. However, this is a Bold move considering the UK is still recording cases higher than their initial first wave. For reference, New Zealand eased up restrictions after weeks of having no community case transmissions.

Daily Coronavirus Cases have not decreased to the peak of the first wave

With stocks at all-time highs, alongside Goldman Sachs calling the UK a buy pre Brexit, this seemingly innocent policy to reopen shops for Christmas is most likely detrimental to the UK’s economy. This shows the UK Government insists on balancing economic damage against human lives, which is somewhat a self-fulfilling circle of deaths and a worse economy.

There is evidence across the world that this method of recovering from the economic damage from the Coronavirus does not work. We saw this in Australia – in which a second outbreak caused Melbourne to lockdown for near as makes no difference, eight months. Only after a strict lockdown with no community transmission were they able to open up confidently without another lockdown. If the UK proceeds with opening up in Christmas, this will cause further economic damage with other lockdowns, which will outweigh the economic activity for Christmas. I am afraid I have to disagree with Goldman’s buy recommendation for the UK.

Bitcoin – $60,000 and beyond?

There's a saying the markets have adopted over time: "Buy the rumor, sell the news." And the cryptocurrency market is no exception. Bitcoin has recently propelled itself to $18,000 – with minimal coverage on the news if we compared its coverage in 2019. However, another rule that I personally go by – If your mum is talking about it, it's a strong signal to sell. By "Mum," I mean anyone who generally is not associated with the specific market.

Maisie Williams a.k.a Arya Stark in Game of Thrones asking her 2.7 Million followers their opinions on the price of Bitcoin.

A recent poll done by Maisie Williams, the actress that played Arya Stark in Game of Thrones, asked her 2.7 Million followers whether she should go long Bitcoin. This begs the question, does Bitcoin have any fundamental basis for moving higher?

Bitcoin – hedge for inflation?

Goldman Sach's view on Bitcoin / Cryptocurrencies

Some people believe that Bitcoin and cryptocurrencies are a natural hedge to inflation. As the Federal Reserve and the U.S. government take out more debt, alongside the Federal Reserve putting particular importance on inflation, many have been concerned about holding fiat currency. However, many firms push away against the notion that Bitcoin is a hedge against inflation, much more than a MacBook Pro, or peanut butter is a hedge against inflation.

A couple of months back, Goldman Sachs sent an email out to institutional investors making points that Cryptocurrencies "Do not show evidence of hedging Inflation," making it one of many firms to push back against this claim. However, it is not to say Bitcoin is not an acceptable alternative asset class to shield against inflation; it is merely less affected by inflation.

Bitcoin – a suitable alternative to Fiat currency?

Many people believe that Bitcoin has excellent qualities for an alternative Currency. However, this is simply not the case. A Currency requires stability in its value, but Bitcoin is anything but stable.

We'll take the Coffee I buy every morning as an example. For the sake of argument, we will peg the price of Bitcoin to $1 USD at the start of 2019.  The price of my Coffee is $4.

Date Value of Bitcoin to USD Value of USD Change BTC
Jan 2020 $4 $4
March 2020 $2.16 $4 -54%
Present $5.74 $4 187%

As you can see, at the start of the year, I could afford to buy that $4 coffee. However, around March, that same $4 worth of Bitcoin is now worth $2.16, which means I would not have been able to afford the $4 coffee.

In comparison to the U.S. Dollar, I purchased that $4 throughout the whole year. I understand this is a flawed test, as we can argue if the price of the Coffee were in Bitcoin, the hypothetical would be reversed. However, with such massive swings, it would be realistic to assume we would get a situation similar to Venezuela, where prices for goods and services fluctuate by the day. This shows that Bitcoin is more similar to Gold or commodities in general.

Bitcoin – Interbank possibilities?

One appeal with Bitcoin and cryptocurrencies, in general, is the low transaction costs it has. Transfers from banks from one country to another can incur fees upwards of hundreds of dollars, and possibly, even more, when larger sums of money are transferred. However, with a centralized system, Bitcoin and many cryptocurrencies incur negligible transaction costs.

For example, Silk Road, an organization which sold illegal services over the dark web was raided by the FBI, in which they took Billion's of dollars of Bitcoin as it was the means they used to transact. It was noted that over $1 Billion USD worth of Bitcoin was transferred from one account to another, incurring a transaction cost of $15.

Cryptocurrencies are definitely a strong substitute for interbank transfers, and we can see that slowly playing out within bigger institutions. Both JP Morgan Chase and Goldman Sachs have appointed a new Global Head of Digital Assets, with JP Morgan exploring the possibility of creating its own blockchain similar to Bitcoin.

Bitcoin - "network effect" in play?

Going back to the original paragraph, Maisie Williams's ponder on whether she should "go long" Bitcoin highlights the general overview of what people think cryptocurrency currently is – as a means to make quick money.

Mike Novogratz, Billionaire, and the Investment Firm Fortress Investment Group's ex-fund manager stated he believes Bitcoin's price will hit $65,000 U.S. Dollar. Novogratz said he expects the price first to hit $20,000 before it gets to $65,000 due to a "network effect," in which there are a ton of new buyers and lowers supply, "So YES, but it."  In other words, he is currently long Bitcoin and wants the "Bigger fool" theory to take place to push his position up.

Bitcoin - Technicals play well with the Coin

Bitcoin - will history repeat itself? Or will it make a move much higher?

Currently, Bitcoin retraced from its $18,500 high to $17,584 in the span of a couple of hours. It is currently approaching a strong psychological level of $17,000. A move below this alongside risk off sentiment may see a move to a 100% retracement level to $13,914. Bulls may see this as an opportunity to move higher to a 161.8% Fib level, above its all time high. If it breaks this level, bulls may tacket it to levels never seen before,

However, Novogratz’s theory makes sense and may be the main driver pushing prices higher. Therefore, there is a case to be made that its time to buy a couple of those Bitcoins.

Stock of the week: Pinterest

Have you been suffering from the quarantine blues? Have you been forced to work at home? Have the kids been bothering you more now that you’re at home?

Chances are then, you’ve thought of customizing your house/workspace to deal with working from home. Or maybe you really like working from home and are using it as an excuse to renovate the whole space. If you are in this specific camp, chances are you have used the service the stock of the week offers: Pinterest.

Pinterest is an online service that enables you to collate photos from all around the world and search based on the photos you save/search up. It’s simplicity sits on top of a complex algorithm, which, like many online websites, displays ads along with it. The genius of Pinterest is that its ads blend in nicely with the content they are showing you. For example,

Where is the Ad?

Can you see the ad? Okay, of course, you could – you were looking for it. However, I am an avid user of Pinterest, and trust me when I say their advertising is effective and blends in really well. Many will be surprised to know that Pinterest is the third most used social media in the United States, just behind Facebook and Youtube.

Pinterest's Catalyst:

Pinterest is definitely a stock that benefits from people working/staying at home more during quarantine. In short, due to quarantine, people have been staying at home longer, which incentivizes them to make their “space” just that bit more special to live in. Such a simple reason for an increase in usage, however, an effective one.  The stock has nearly doubled in the past year, with revenues surging 58% from a year ago with their monthly active users at 442 million vs. an estimated 436.38 Million estimated.

Furthermore, digital consulting firm Avionos stated that media sites like Pinterest had been a popular advertising tool for brick and mortar retailers as it provides them with a more pleasing way to advertise their products.

Pinterest’s Risks:

Pinterest has been on a rally, up 25% on recent quarterly earnings

This is around the time I say that the risk is its valuation – however, the stock is in its early stages, having only IPO’s in the middle of last year. With that said, the stock price today is at an all-time high. The main risk for Pinterest is also its main attraction - users going to the site for inspiration. Once they get their inspiration, the risk for Pinterest is that they stop using the site, creating a churn and burn type business.

Pinterest - Conclusion:

Despite its risks, I believe that Pinterest has a strong user base that uses it to draw inspiration and imagine how their future may be with the thing they’re looking for. Furthermore, their advertising methods may prove effective when trying to convert users into purchasing their goods.

Interesting points from Gemini’s 2021 State of US Crypto Report

Gemini, the US-based crypto exchange, surveyed 3000 US-based investors. The result gives a snapshot of the general sentiment held toward crypto assets. A few illuminating facts are contained in the 16-page report. Perhaps the most exciting facet relates to how the demographic of crypto holders might radically change in the next wave of adoption.

Read the full story at fxstreet.com

Gemini state of crypto

Private payrolls drop by 20.2 million in April

Coronavirus induced job losses continue to wreak havoc in the United States as private payrolls drop more than 20.2 million in April according to a report from ADP. This has surpassed the record for drops in private payrolls set by the Global financial crisis of 2008 – by 19.4 million.

The total number of the private payrolls decrease, 20,236,000, is comprised of 6m from small businesses, 5.27m from medium-sized businesses, and 8.97m from large-sized businesses. However, this is lower than the total 22m that economists at Dow Jones had been expecting. It is likely as the Coronavirus continues to ravage the United States with cases continuing to grow by at least 20,0000, that the private payroll numbers will continue to worsen. This is alongside the United States weekly jobless claims reaching an unprecedented 30 million over the past couple of weeks

Big names slashing large numbers

Large growth businesses are not immune to the damage the Coronavirus has done to the economy. Companies such as Airbnb laying off 1,900 workers or around 25% of their workforce alongside Uber cutting 3,700 workers, 14% of their workforce. Not to mention airlines, with the likes of Air New Zealand initially laying off 1500 cabin crew with an estimated 2,600 more job cuts, 30% of their workforce, in the future.

How are these numbers in comparison to the rest of the world?

Unemployment spikes have differed across the world as governments try to balance economic health with the health of their population. With governments tackling the issue differently, only time will tell if supporting businesses directly will be more beneficial in the long run in comparison to supporting businesses directly. For example, Australia has forecasted unemployment to reach 10%. ANZ’s Senior Economist Catherin Birch told 7 News in Australia that thee “government Jobkeeper Payment plan to keep people in work could temper the rise in unemployment to around 9.5%”. New Zealand is forecasting similar figures with similar results if the government implements appropriate financial support.

Coronavirus – changing the way we work?

As working from home has suddenly become the norm for many employees, it is yet to be seen whether this new trend will take off once the Coronavirus is behind us. For example, expensive business trips overseas may be replaced with free video calls, and tapping a colleague over the shoulder may be replaced with slack messages. A fundamental shift may be at play as the world population shifts to a more health-conscious way of living their lives.

How have the markets reacted to the private payrolls number?

The US markets were relatively muted to the news across the board with the SP500 and Dow Jones finishing .7% and 0.91% lower respectively. The NASDAQ edged higher by 0.51%. Volatility is at a 1 month low, with the VIX finishing just over 34, 26% lower than a month ago. It is also interesting to note the performance of the widely used benchmarks since the start of the year.

SP500 and NASDAQ's performance YTD

With the SP500 being down around 12.6% versus the NASDAQ being down only around 2.6%. This is primarily due to the NASDAQ being heavily weighted in tech at just under 50%, conveying that they have been doing the heavy lifting during these unprecedented times. Alongside this, European equities are preforming significantly in comparison to their American peers, down 20.34% for the year. However, taking a look at previous economic downturns, and a potential second wave, there may be more red to be seen in the economic markets before things get better.

Oil is on a five-day winning streak

Oil's winning streak has given traders and investors alike a glimmer of hope. West Texas Intermediate and Brent Crude, the United States, and International proxy for oil prices have been ranging around $25.20 and $31, respectively. Furthermore, it was just a week ago when oil prices were on a losing streak, were prices dropped as low as $10.07 for WTI and $19.99 for Brent. Today’s price represents 150% and 50% gain off last week's prices.

There have been plenty of factors against the commodity such as the Coronavirus shattering short term demand for refined crude,  Saudi Arabia, and Russia's price war alongside negative prices which caused devastating losses for retail investors in securities such as United States Oil Fund (USO). Alas, the oil market has endured once of the bloodiest months on record. Retail investors and traders are clinging on to any positive news and forecasts on the shattered commodity.

Oil stockpile increase in Cushing, Oklahoma where WTI futures are settled

Will oil continue its winning streak? 

There have been tentative signs that the stabilization of oil is near the horizon. Firstly, inventory buildup at Cushing, Oklahoma, is slowing down and the oil supply cuts from numerous countries are taking effect, alongside demand slowly picking up as many countries come out of lockdown. Magnus Nysveen told Bloomberg that The market is still vulnerable, but now one thing is clear, the demand bottom is behind us, and this is manifesting in oil prices which are on the rise.” Furthermore, analysts at RBC Capital Markets pointed out that congestion data in the US conveyed vehicle traffic had rebounded off their lows.

However, it’s not all rainbows and roses for oil. Even with the cuts, market supply still outpaces demand. And even though inventory buildup is slowing down, there is still buildup occurring.  Furthermore, a second wave of the Coronavirus is not out of the question. The market’s attention will be at EIA’s Cushing Crude Oil Stocks announcement tomorrow, forecasted at 2.95m barrels.

Anish Lal has some excellent technical commentary on Oil's winning streak and its future price. You can watch the video here.

Is it time to start looking at oil?