Could a Stronger Euro Bring Relief To Global Markets

This is generally regarded as the global “risk-free” rate. It’s not too much of an exaggeration to say that every other asset in the world is priced with reference to this slab of US government debt. But a close runner up is the US dollar.

A strong US dollar sucks money out of risk assets

The US dollar is one of the most important prices in the world. It’s the global reserve currency – everyone needs US dollars. As a result, when the price of US dollars goes up, you can view it as monetary policy getting tighter around the world (that’s an oversimplification, but it’s quite a useful one).

This is at least one reason markets have struggled in recent months; the Federal Reserve, America’s central bank, has been ahead of other economies in terms of raising interest rates, while the US economy has also looked relatively resilient. The US dollar is also a “safe haven” asset, which means that it benefits when investors are feeling jittery.

As a result of all this, the dollar has shot up in value against other major currencies. And risk assets don’t like that one tiny bit. As my colleague Dominic pointed out earlier this month, “if the US dollar keeps rising from here, it’s going to hurt”.

The good news is that after a burst higher, the dollar is now a little lower than it was when Dominic wrote that piece. One key reason for that is the European Central Bank (ECB) – we’ll explain why in a minute. First, what’s the ECB done?

Well, yesterday, ECB chief Christine Lagarde came out with a blog post in which she – unusually for a central banker – was really quite clear about what the central bank will be doing over the next couple of quarters.

To summarise, she said that the ECB will stop printing money soon, it will start raising interest rates in July, and by the start of October rates will be back to 0% (ie, out of negative territory).

That’s quite an emphatic change for the ECB. As Marcus Ashworth says on Bloomberg, “I struggle to recall any central banker, certainly not one from the ECB, ever having been this definitive about the monetary policy outlook.”

There are probably two reasons for it. One is that the ECB has been lagging somewhat. Inflation has taken off in the eurozone too, but unlike the US, the economy has looked weaker so it’s been a tougher juggling act. But now it looks as though the hawks (for want of a better word) have won.

The second reason is that the euro was threatening to hit parity with the US dollar. In pure market terms, parity is just another number, no more or less significant than 1.01 or 0.99. But of course, it’s not actually just another number; it’s a big scary round number and one that grabs headlines. It’s probably best avoided if possible.

Part of a central bank’s role is to act as the guardian of the currency. That’s even more important in the eurozone than elsewhere because the euro is young and the lack of full political union between all of its member countries means there are still serious fault lines that could threaten its existence.

This risk has retreated greatly. During the sovereign bond crisis of the 2010s, the ECB, under Mario Draghi, effectively won the right to print money to suppress national bond yields – and thus underwrite the solvency of individual eurozone nations – where necessary.

But it’s better not to get to the point where markets decide to test your resolve on that front.

Why a stronger euro might be good news for markets

So why is this good news from a strong dollar front? Because the euro is the “other” global reserve currency. It’s miles behind the dollar in terms of being stockpiled by central banks around the world, but it is the biggest component in the “DXY” index which measures the dollar’s strength against a basket of rival currencies. It is probably the most widely-watched barometer of dollar strength.

As a result, when the euro bounces against the dollar, DXY tends to fall. And what with this being quite a hawkish turn for the ECB, the euro rallied from falling as low as $1.03-ish last Friday, to heading above $1.07 now.

Meanwhile, on top of that, it helped that one of the monetary policy setters at the Fed – Raphael Bostic, the head of the Federal Reserve bank of Atlanta – said that it might make sense for the Fed to pause for breath in September on interest-rate rises.

That’s hardly a wildly dovish statement (it implies half-point increases in both June and July), but with the market currently sweating that Fed boss Jerome Powell hopes to inherit the mantle of inflation destroyer from Paul Volcker, any sign that the central bank might relent is welcome to investors.

A weaker dollar would be good news for investors, as it implies that the rush for safe havens will ease and investors will start seeking risk again.

That doesn’t mean it’ll happen. However, one feasible scenario in which this might continue is one in which inflation ebbs (even while remaining high) and other central bank policies start to converge with that of the Fed.

That’s certainly possible over the coming months. Does that mean you should be piling in as if everything is back to the tech bubble days? Not at all; the environment has changed and the winners over the next phase will differ from those of the last. But it does imply that the “crash-y” behaviour we’ve seen since the start of this year might be due a breather. Fingers crossed.

By: John Stepek

Source: Could a stronger euro bring relief to global markets? | MoneyWeek

Further reading:

A New Idea To Reduce Wealth Inequality: Tax Capital Gains At Death At A Higher Rate Than During Life

Senate Finance Committee Chair Ron Wyden (D-OR) have proposed different ways to tax unrealized capital gains every year. Their shared goal is understandable, with trillions of dollars escaping income tax under current law. But each plan raises serious administrative and legal problems. My colleague, Rob McClelland, and I suggest a simpler, more effective approach: Tax unrealized gains of the wealthy at death at a higher rate than if assets are sold or given as gifts during life.

An unrealized gain is the increase in the value of an asset, like stock, which has not yet been sold. Taxing these gains is important because unrealized gains now account for more than half of the staggering amount of wealth of the very richest Americans, those with at least $100 million of net worth.

Current law encourages the wealthy to hold their assets until death, when those gains escape income tax permanently. This happens for two reasons. First, current law does not treat a bequest as a sale so no income tax is due at death. And, second, heirs are allowed a “stepped-up basis” where they never pay tax on any increase in the value of property during a decedent’s lifetime.

The results: Government loses a massive amount of revenue, wealth inequality is perpetuated through generations, and investors are encouraged to retain (or “lock-in”) poorly balanced, and less productive, portfolios. More than fifty years ago, two leading tax experts described the failure to tax gains of property transferred at death as “the most serious defect in our federal tax system.”

To fix this longstanding flaw, our plan would tax unrealized gains at death for the very rich (couples with more than $100 million and singles with more than $50 million) at the tax rate for ordinary income—currently 37 percent. But profits from sales or gifts of assets during life would still be taxed at 23.8 percent. Transfers to spouses would be tax exempt. And the very rich would be allowed to deduct their income taxes at death from their estate taxes.

Our proposal turns the existing incentive for appreciated assets on its head. Instead of encouraging people to hold their appreciated assets until death to avoid income taxes, our proposal encourages them to sell these assets before they die.

For example, imagine an entrepreneur who owns $100 billion of his company stock, for which he paid nothing when he founded the firm. Under our proposal, if he holds his stock until death, he’d owe $37 billion in income tax. But if he sells during life, he would owe $23.8 billion. And, if he wants to transfer his stock to his children without paying the $37 billion, he could give his stock to them during his life and pay $23.8 billion.

To determine the reach of our proposal, Rob reviewed data from the 2019 Survey of Consumer Finances, which he combined with Forbes 400 information (which is excluded from the survey). He estimated that taxpayers subject to our proposal have unrealized gains totaling about $7.5 trillion in 2022.

If these households realize $6 trillion of their $7.5 trillion of that gain during their lifetimes, and the remaining $1.5 trillion at death, our proposal would raise almost $2 trillion over time. Over the next 10 years alone, our plan could raise several hundred billion dollars, just like Biden’s and Wyden’s plan. (Our plan could raise more than theirs eventually, as our tax rate at death is higher than Biden’s and Wyden’s.)

For simplicity, we assumed the unrealized gains don’t grow over time, which likely makes our estimates conservative.

Taxing the wealthiest households on their unrealized gains at death is much easier to administer than Biden’s or Wyden’s plans to tax them annually. Our plan would rely on existing estate tax returns, and valuations, which the rich already file, while Biden’s and Wyden’s plans would require new annual filings for taxpayers during their lifetimes.

While few taxpayers would pay Biden’s or Wyden’s tax, many more would need to value all their assets annually, as taxpayers close to the line might move in and out of the regimes over time. How would the IRS determine whether all these taxpayers filed properly?

Finally, our proposal to collect taxes on transfers by gift or bequests is well -established under the US Constitution, but collecting taxes outside of transfers during their lifetimes raises unresolved legal issues.

Today, older, wealthier taxpayers often hang on to appreciated assets during their lifetimes, waiting to transfer them at death. Our plan encourages them to realize gains during life, which could lead to better balanced portfolios, broaden ownership of these assets, and generate much-needed tax revenue.

I am a Senior Fellow in the Urban-Brookings Tax Policy Center. I research, speak, and write on a range of federal income tax issues, with a focus on business

Source: A New Idea To Reduce Wealth Inequality: Tax Capital Gains At Death At A Higher Rate Than During Life

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Why The Dow Plunged More Than 1,000 Points? Should I Wait For Stocks To Sink Lower

What a difference a day makes. Fresh off the best percentage gain for the Dow Jones Industrial Average DJIA, -0.30% since Nov. 9, 2020, the blue-chip index got clobbered, along with the rest of the stock market, including the S&P 500 SPX, -0.57% and the Nasdaq Composite COMP, -1.40%.

Not even U.S. Treasurys were safe, with the 10-year Treasury note TMUBMUSD10Y, 3.127% climbing above 3% as prices fall.

Some experts attributed Wednesday’s rally to a statement by Federal Reserve Chairman Jerome Powell that a 75-basis-point increase wasn’t being actively considered by policy makers at the central bank at coming meetings.

The remark came after the Fed on Wednesday delivered the first half-percentage-point interest-rate hike, as had been widely expected, since 2000, in the final months of President Bill Clinton’s second term.

The Fed has been hiking rates to combat a surge in inflation that materialized in the aftermath of the COVID-19 shutdowns and dislocations, and which has been exacerbated by bloody conflict in Ukraine following Russia’s invasion in late February.

Some industry watchers peg Thursday’s selloff partly to fears that inflation will continue to dog the economy in the U.S. and elsewhere in the world.

Data on Thursday showed that the productivity of American workers and businesses sank at an 7.5% annual pace in the first quarter, marking the biggest drop since 1947, amid supply shortages and production bottlenecks.

“It was a setback for our Roaring 2020s scenario of a technology-led productivity growth boom offsetting the chronic shortage of labor,” according to Yardeni Research, a provider of global investment strategy founded by Ed Yardeni, a MarketWatch contributor.

Meanwhile, Greg Bassuk, CEO at AXS Investments in New York, said the day’s action reflects “a continuation of 2022’s market roller coaster of high volatility, with this session’s strong spiral downward erasing yesterday’s gains.”

Bassuk told MarketWatch that “investors are selling today on renewed concerns regarding the plethora of continued uncertainties.”

The AXS CEO pointed to tensions with China, Russia’s siege in Ukraine, as well as a mixed bag of corporate earnings and nagging concerns about COVID-19 hamstringing a more powerful recovery in parts of the world.

Recession fears and inflation worries have been the centerpiece of the current bout of bearishness on Wall Street. “There’s no doubt that inflation, rising rates and volatility will continue to characterize the market environment in [the second quarter] and beyond,” Bassuk said.

“What is really interesting about these markets is that there are these every-other-day changes in either direction where investors are outrageously bullish, or outrageously bearish the next day,” said Sylvia Jablonski, chief executive and chief investment officer at Defiance ETFs in New York.

Indeed, MarketWatch’s Bill Watts wrote that, with the exception of 2020, the S&P 500 has already topped or is on track to exceed annual totals of 2%-or-greater moves for every year stretching back to 2011.

“Inflation may have peaked, growth may be slowing, but it is still positive. The consumer is still spending, [and] employment is at all-time highs,” she said, going on to point to the up to $2 trillion in excess savings said to have been amassed during the pandemic.

Market Extra (July 2021):

The volatile state of the market is stoking confusion about the outlook. Is this time to jump into stocks, or should investors wait for a better entry point? Or should we heed billionaire investor Paul Tudor Jones’s advice and stay clear of traditional markets altogether?

History suggests that you can’t time the market and that, over a long period, the market wins. The big question is what’s your time frame what’s your tolerance for pain?

The slump in bonds, with yields rising as prices fall, is complicating matters for some investors. Treasurys, notably the benchmark 10-year U.S. government bond TMUBMUSD10Y, 3.127%, traditionally are seen as a refuge in times of uncertainty, but they also have been undone given the Fed’s current rate-hike plan, which has led to selling in bonds in the hope of richer yields to come.

Source: Why the Dow plunged more than 1,000 points? Should I wait for stocks to sink lower? Here’s what some pros think. – MarketWatch

.

More contents:

Based on 19 bear markets in the last 140 years, here’s where the current downturn may end, says Bank of America

Stock market selloff in ‘liquidation’ stage. Why it needs to get ‘hotter’ before it burns out.

This trader predicted the bond meltdown, tech selloff and oil’s surge. Here’s what she says is coming next.

Barron’s: JD.com and NIO Face More Delisting Concerns. The Stocks Are Falling.

The Dow Dropped Again, Jobs Growth Was Strong—and What Else Happened in the Stock Market Today

College enrollment is falling. Here’s how it could impact the economy

‘The pandemic boom in home sales is over’: Mortgage rates soar to highest level since 2009 as the Fed pressures the housing market

The long bull market run in bonds has come to an end,’ says Guggenheim’s Scott Minerd

Dollar soars as Bank of England’s grim economic forecast gives investors reason to sell off Treasurys, stocks

A rough 4 months for stocks: S&P 500 books the worst start to a year since 1939. Here’s what pros say you should do now.

China-focused ETFs sink as Blinken reportedly plans to affirm that China is the main U.S. rival

U.S. wealth grew by $19 trillion during the pandemic — but mostly for the very rich

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India’s Young Investors Prefer Crypto To Gold and Boring Stocks

Indian businesswoman Swati Daga first bought bitcoin in 2017, when the cryptocurrency was trading well under $3,000. Her decision to invest in digital currencies was met with wariness by her family, she recalls.

“The elders in my family told me not to throw my money away,” said Daga, who runs a food business near New Delhi.But the 33-year-old hasn’t regretted her decision — bitcoin’s value has increased 15 times since then — and she continues to invest as much as 10% of her savings in cryptocurrencies, including bitcoin and ethereum.

“I find stock markets boring,” she told CNN Business, adding that she enjoys the “thrill” and “recklessness” that comes with investing in volatile currencies. She is not the only one. India has seen a huge boom in cryptocurrency trading since the start of the pandemic, even though authorities in Asia’s third largest economy have for years expressed concerns about digital currencies, and even banning them.

Entrepreneurs in the industry told CNN Business that the country has the potential to become a crypto superpower, since it is one of the hottest internet markets in the world, with 750 million users, and hundreds of millions more yet to come online for the first time. India ranked second behind only Vietnam last year in a list of countries seeing the fastest growth in cryptocurrency adoption, according to a report published in October by blockchain data platform Chainalysis.

While the government does not keep estimates of how many people trade cryptocurrencies, industry experts have suggested that the country may now have more than 20 million crypto investors. The growth is driven by younger investors — mostly under the age of 35 — and many of them are coming from smaller cities and towns, founders of two of India’s biggest crypto exchanges told CNN Business.

According to Sumit Gupta, CEO and co-founder of exchange CoinDCX, many Indian millennials have started “their investing journey with crypto.” While 20 years ago, their parents chose to invest in gold, these youngsters “are more interested in having bitcoin as part of their portfolio,” Gupta told CNN Business, referring to the fact that traditionally Indians chose to park their money in gold or savings accounts.

Buying gold is both an investment and a cultural habit in India, which is one of the largest markets for the precious metal, according to the World Gold Council. It also considered auspicious by Hindus and Jains, and plays a fundamental role in many religious ceremonies. Mumbai-based CoinDCX became India’s first crypto unicorn last year, achieving a valuation of $1.1 billion after raising money from investors such as Coinbase Ventures and B Capital Group.

The company says 70% of its 10 million users are between the age of 18 and 34. The CoinDCX app is seen on a phone screen in West Bengal, India, in August 2021. Data shared by rival firm WazirX tell a similar story. WazirX also has over 10 million users, and called 2021 a phenomenal year for crypto trading in India. The company was acquired by Binance,  one of the world’s biggest cryptocurrency exchanges, in 2019.

Over 65% of its users are under the age of 35, according to a recent company report, and it has seen a “700% increase in the number of participants from smaller cities like Guwahati, Karnal, Bareilly, thereby signaling the growing interest from rural and semi-urban areas.”

Pritish Kumawat, a crypto trader from a small town in the western state of Rajasthan, said that he now finds conversations about cryptocurrencies in almost every tea shop in his area.

Often, the most engaged participants are college students, he said, adding that bitcoin’s massive spike last year has fueled the frenzy in India. In November, bitcoin was trading at a record high of $68000 but it has since fallen to around $43,000. In addition to bitcoin, meme currencies such as dogecoin and shiba inu are also popular among Indians, the WazirX report added.

Apart from investors from smaller towns, both companies saw an increase of more than 1000% in the number of women users on their platforms, albeit on a small base. Gupta said that participation of crypto by Indian women has seen “a massive upside” in the past 18 months and is “fairly high, fairly healthy, relative to equity markets.” The company’s data shows that 15% of their overall users are women — which is the global trend as well.

On-again, off-again relationship

The excitement over crypto is rising in India despite the country’s on-again, off-again relationship with digital currencies. The central bank has long expressed concerns that cryptocurrencies can be used for money laundering and to finance terrorism. A cryptically worded proposal posted on the Indian parliament website last year even suggested the government was exploring plans to “prohibit all private cryptocurrencies in India.”

This year, however, started on a more cheerful note for enthusiasts. Earlier this month, the Indian government announced it would impose a 30% tax on income from virtual digital assets, which many industry experts took as a sign that crypto trading won’t be banned after all. The government also said it would launch a digital rupee in the coming months.

“Taxation of virtual digital assets or crypto is a step in the right direction. It gives much-needed clarity and confidence to the industry,” Gupta said at the time of the announcement. Siddharth Menon, the co-founder of WazirX, told CNN Business that following the announcement, his platform saw daily sign-ups jump by over 50%. He also noticed rising interest among Indian developers and other professionals in joining the crypto industry.WazirX's website is shown in New York, USA, in April 2021.

“I’m getting LinkedIn messages” from senior executives in India, who are now more optimistic about the business, he said. In the past, Indian exchanges have struggled to hire and retain experienced people due to the lack of clear regulations. But the Indian government soon put a damper on the mood, by clarifying that the cryptocurrencies are not yet legal in the country.

“I am not doing anything to legalize it or ban it or not legalize it,” Finance Minister Nirmala Sitharama said in parliament a few days after announcing the tax rate. “Banning or not banning will come subsequently … But I will tax because it is a sovereign right.” “I think the government is not entirely sure what it wants to do from a policy perspective,” said Anirudh Rastogi, founder of tech law firm Ikigaw Law, which works with crypto exchanges in India.

“It knows where it wants to land broadly. It wants to find the right balance where it is not disconnected from the global progress in blockchain and other tech, but it wants to also address concerns regarding cryptocurrency.” Rastogi added that the “extraordinarily high” tax on crypto is a short-term fix, which will also acts as a deterrent to many investors.

“This rate is typically used to tax activities that are not considered economically productive, such as lottery,” he said. “So this could be an indication that the government wants to make revenue, but it does not see crypto trading as economically productive.” For equities, India applies a 15% short-term capital gains tax if shares are sold in less than a year, and 10% if sold after a year.

Gupta hopes that the government makes up its mind soon. India, with its vast pool of developers and enthusiastic young population, could be a “superpower in the next five to 10 years,” in cryptocurrency and blockchain industry, he said. “What is missing right now is a clear regulatory framework,” he added.

Source: India’s young investors prefer crypto to gold and ‘boring’ stocks – CNN

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Russia Debt Default Could See the US Seize the Country’s Assets

The impending Russian debt default is likely to be one of the most difficult in history to resolve, and could even lead the US to permanently seize assets from the country’s central bank, according to a report from the consultancy Oxford Economics.

Russia is facing its first default on its foreign-currency debt since the aftermath of the Bolshevik revolution in 1918.

The US Treasury earlier this month blocked Russia from paying $650 million due on two bonds using funds held at American banks. Russia has instead tried to pay in rubles, but credit ratings agencies have said this would constitute a default.

Russia has a 30-day grace period from April 4 in which to pay in dollars. But thoughts are now turning to the next steps, and how bondholders might recoup their money.

Tatiana Orlova, lead emerging markets economist at Oxford Economics, said investors face a “very long and difficult” legal road. “Russia’s debt crisis will be among the most difficult in history to resolve, since the default has its roots in politics rather than finance,” she wrote in a report that was sent to clients Thursday.

One of the key problems is that political and financial relations between Russia and the West have completely broken down. That makes the usual default process, whereby bondholders and the government enter negotiations and thrash out a deal, seem unlikely to happen.

Orlova said another problem for bondholders is that Ukraine may lay a claim to Russian assets in international courts to pay for the rebuilding of the country. In that case, investors would have to weigh up whether they want to compete with the Ukrainian government for Russian assets.

The economist said the US might eventually end up seizing the money from the Russian central bank’s foreign currency reserves. Western governments have already frozen the bulk of the roughly $600 billion stockpile. Joe Biden earlier this year ordered that half of Afghanistan’s central bank reserves, which were also frozen, be made available as possible compensation for victims of 9/11 and to fund humanitarian support in the country.

“The US administration could possibly find a stronger moral cause for splitting the US-denominated portion of Russia’s FX reserves between Ukraine and bondholders,” Orlova said. Russia’s Finance Minister Anton Siluanov has said the government has fulfilled its obligations by paying in rubles. He said last week Western governments are forcing Russia into a default and threatened to take legal action.

It’s not just holders of Russian sovereign debt who may have to take to the courts to try to get their money. Orlova’s report said there is likely to be an “avalanche” of Russian corporate debt defaults, given that the US is taking a hard line and banning American banks from processing payments.

An international committee of banks last week deemed state-owned Russian Railways to be in default, after sanctions stopped the company from making bond payments.

There were roughly $98 billion of Russian corporate foreign-currency bonds outstanding as the war began in February, according to JPMorgan, with $21.3 billion owned by foreign investors.

By:

Source: Russia Debt Default Could See the US Seize the Country’s Assets: Economist

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Critics:

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A default would make Russia more of a pariah in the global economy. Selling bonds is a critical way that countries raise foreign currencies to fund projects and raise reserves of foreign currencies, among other purposes.

But the European Union is considering a ban on energy imports from Russia, which would further limit Russia’s ability to raise money in foreign currencies.Countries that have defaulted on their bonds have eventually been welcomed back to global debt markets, but memories of a default linger and Russia may have to pay more to borrow from foreign investors in the future.

A default would also be historically significant and fraught with symbolism. It would mark the first time Russia has defaulted on foreign bond payments in more than a century (though it did default on local currency debt in 1998). Russia’s predicament is yet another consequence of its invasion of Ukraine, according to Tim Samples, a professor at the University of Georgia who specializes in foreign investment.

“This is a reflection of just how far and how fast Russia has fallen from favor in Western capital markets,” he said. Not necessarily, but most investors will need to go through a protracted legal battle to try to get the money they are owed.

Although Russia was not a big seller of foreign debt, major hedge funds and asset managers, including Invesco and PIMCO, bought bonds. Russia has 15 bonds outstanding that are denominated in dollars and euros, and altogether, they are worth around $40 billion, according to Morgan Stanley.

Much of Russia’s debt was registered in the United Kingdom, which is where it’s likely that most of the court fights will take place. It can be a complicated process, and it will take a long time to resolve. After Argentina defaulted in 2001, several efforts were made to restructure the country’s debt. All told, negotiations lasted longer than a decade.

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