Indices attempt a recovery in a quiet day, dominated by sharp rallies in cryptocurrencies and solid bounce in bond yields, says Adam Button of ForexLive.com.
The enthusiasm for meme stocks collapsed on Tuesday in a 60% drop in GameStop (GME) and 8% decline in silver. Below is the chart highlighting the latest record-breaking run by Ethereum, overshadowing the gains in other cryptos. Ethereum is +1093% since Jan 2020 vs Bitcoin's +374% and +72% and 10% respectively since Jan 2021.
As we highlighted early on, the meme stock madness led to some equity market liquidation on fear of hedge funds blowing up or having to sell winners to raise cash. There has been a clear inverse correlation between broader equities and meme stocks in the past week and with the craze crashing down, the market has quickly bounced back. As we wrote earlier in the week, this was just a thing that happened, not a sign of an imminent change in the market or the economy.
What's more of a puzzle is the US dollar, which was strong again on Tuesday even as risk appetite picked up. It's still early and it could be flows but we're seeing stronger signs of the death of the old "risk trade". There is increasing evidence that US growth is going to outperform in 2021 and 2022, closing the covid output gap well ahead of others. With the US continuing to pile on fiscal stimulus, there's a very good chance the Fed is the first to hike.
Learn more about Adam Button by visiting ForexLive.com.
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