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Inside The Broker

Inflation, Tesla, Coinbase and Bitcoin


Inside the Broker

Inflation, Tesla, Coinbase and Bitcoin

Earlier this month the S&P 500 closed out at a record high of 4,233. This topped off a mini rally that began in early March, within a bigger rally which started in March the previous year. The latter followed a crash of 35% in the space of a month as the seriousness of the coronavirus pandemic became apparent, and as governments around the world responded with lockdowns. We’ve seen similar moves for other US and European indices, although the UK’s FTSE 100 and Spain’s IBEX are both still some way off their all-time highs. But back to the S&P which appears to be consolidating. There’s some decent support around 4,060 and, at the time of writing, we’re seeing a retest of resistance around 4,200.

Inflation concerns

There are fears that inflation is picking up, particularly in the US and UK. The jump in the US Consumer Price index two weeks ago was blamed for a sharp sell-off which saw the S&P slump around 5% in just four days. This explanation sounds like market hindsight to me as the S&P was already down sharply prior to the release. In addition, it soon found a bottom and rallied significantly over the next two days. Despite this, there’s no doubt that investors are wary of a pick-up in inflation, or rather the US central bank’s reaction to it. The feeling is that the Federal Reserve will be forced to counter rising inflation by tightening monetary policy earlier than previously envisaged. That is, tapering its monthly bond purchase programme and then raising interest rates. This fear comes despite repeated statements from the Fed insisting that they’re not ready to properly talk about tapering, let alone actually planning it. The central bank has also made it clear that they want to see a significant improvement in the unemployment picture before they start tightening.

Tapering

Why should tapering worry investors? Well, many believe that stock markets are only as strong as they are due to central bank largesse. There may be some truth in that, so it’s understandable that investors worry about how markets will react when the Fed starts to withdraw its support. But that problem should be for another day as for now the post-pandemic economic recovery continues.

Image shows two boxes with stocks ranked in order of popularity from top to bottom

Smart News and our Dashboard

We’ve been delving into the data thrown up by our Smart News social media widget over the last week. For all this period, up until Friday, Tesla topped the chart of most-mentioned corporations by a significant margin (see the left-hand box above). Pfizer followed Tesla early in the week, but both were overtaken by Apple, Facebook, and Alphabet (Google’s parent company) by Friday (see right-hand box). Why should this be? The prime theory considers the increasing influence that sharp movements in Bitcoin are having on certain stocks. Certainly, when it comes to the mention of all topics, Bitcoin is only surpassed by coronavirus as the main subject of conversation on social media. Bear in mind that the price of Bitcoin has declined sharply over the last fortnight. In fact, last Wednesday it fell 30%, coming within a few points of breaking 30,000 to register its lowest level since January this year. Although slightly less dramatic, Tesla lost 28% of its value between mid-April and mid-May, while the crypto exchange Coinbase, which went public last month, lost 39% over a similar period. Both companies have significant exposure to Bitcoin. Coinbase is where much of Bitcoin is traded while Tesla revealed in February that it had bought $1.5 billion of the cryptocurrency. But once Bitcoin bounced off 30,000 and as concerns declined over the possibility of the Fed tightening monetary policy earlier than expected, the top tech stocks became the main talking point once again, pushing Tesla down the rankings.

What was the reason for Bitcoin’s sudden decline? Well, like the S&P 500 it had gone up a lot in a short period of time. Then, for whatever reason, Elon Musk came out with some disparaging tweets and comments, while China announced a raft of fresh regulations. But that one day 30% collapse coincided the release of minutes from the US Federal Reserve’s monetary policy meeting in April. The very fact that Fed members mentioned tapering, even though they have yet to timetable in a discussion about it, led to an initial knee-jerk sell-off which unwound as quickly as it began. Bitcoin and other cryptos love money printing which undermines the US dollar and other fiat currencies. So, any hint that it may be coming to an end can panic crypto speculators. But what is important to take away from all this is the influence that a highly volatile and speculative instrument can have on other markets. It’s certainly not a challenger to the US dollar, but Bitcoin is starting to embed itself into the world’s financial plumbing.

Smart News

You can follow everything that’s finance-related in social media by clicking on to our Smart News widget. You’ll find the button on the bottom-right of our trading platform when you log in to the Trade Nation live account. Here you can launch feeds that we’ve created or put your own together based on your favourite watchlists. Smart News really can help you stay ahead of market-moving events.


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