The Stock Market Is No Longer Afraid of Inflation. Now It’s Scared of the Fed.

May 25, 2021

Observations & Insight

To Start A Revolution, The Small Exchange Needs Revolutionaries
John Lothian – JLN

An Old Idea To Start A New Revolution

In a recent JLN interview, Donnie Roberts, the CEO of the Small Exchange, said he “want(ed) people to join a bit of a revolution that we feel we have started.” If Roberts is going to succeed, he is going to have to put on his Phrygian cap and start a real revolution.

Luckily for him, there is a revolution in retail trading happening right now.

One of the elements that has propelled the Small Exchange to its early success is also the thing that could hold it back from a revolution. That element is its strategic owners, who have strong ties to the dominant exchanges. Small Exchange’s strategic investors, like Citadel, PEAK6, Jump Trading, IBKR and Phillip Capital, need to balance their revolutionary zeal with their much larger business interests in the dominant exchanges, e.g., CME Group and Intercontinental Exchange.

For the rest of this commentary, click HERE.

Lead Stories

The Stock Market Is No Longer Afraid of Inflation. Now It’s Scared of the Fed.
Jacob Sonenshine – Barron’s
Investors have digested the idea that inflation is currently running above previous expectations. Now, the focus shifts to the Federal Reserve—and how quickly it will respond to the rise in prices.
There have been plenty of reasons for concern. Measures of inflation in the prices consumers pay have consistently exceeded forecasts in the past several weeks. A year ago, prices were knocked lower by the pandemic, so they are rising rapidly as life in the U.S. returns to normal. Trillions of dollars in government aid is creating demand, while problems in the supply chain are raising costs for companies, forcing them to raise prices.
/bit.ly/2RLH2Sz

The Volatility of Bitcoin, Crypto, Reddit Stocks Shows Trading Isn’t Investing
Mark Gilbert – Bloomberg
One reassuring aspect of the rollercoaster ride that saw Bitcoin lose half its value in less than two months is the immunity of the real financial world to contagion from crypto tokens, which I increasingly think of as UnfunnyNotMoney. But there is a danger that speculators, particularly if they’re young and inexperienced, have a “once bitten, twice shy” reaction to losses that could harm their propensity to allocate cash to long-term savings.
The gamification of finance is a worrying trend, and it’s not just restricted to buying and HODLing digital currencies. The FOMO/YOLO crowd has also embraced equities, as we saw earlier this year with the rise and fall (and rise again) of GameStop Corp. and other Robinhood Markets Inc. favorites that caught the attention of Redditors.
/bloom.bg/3bOVVKM

China’s renminbi hits three-year high against dollar
Thomas Hale – Financial Times
China’s currency hit its strongest level against the dollar in three years, posing a challenge for Beijing as it seeks to balance demand for the country’s exports with surging commodity prices.
The onshore-traded renminbi gained 0.2 per cent to reach Rmb6.4052 per greenback on Tuesday, its highest point since June 2018. Meanwhile, the country’s CSI 300 of Shanghai- and Shenzhen-listed shares enjoyed its best day since July, rising 3.2 per cent.
/on.ft.com/34i9puy

Options, Bitcoin And SPX: What’s The Connection?
Seeking Alpha
Summary
The stock market has been increasingly volatile of late. But until proven otherwise we are witnessing a rotation not a full market correction.
Aside from the crash in tech stocks and the lack of new leadership emerging, there may be more to the stock market’s troubles than meets the eye.
Much of the recent selling may be related to the recent crash in Bitcoin and related margin calls.
/bit.ly/2Ti1k6N

Exchanges and Clearing

ICE Reports Record Total Futures and Options Open Interest of 84.5 Million Contracts; Total Open Interest +8% y/y
Intercontinental Exchange, Inc.
Intercontinental Exchange, Inc. (NYSE:ICE), a leading global provider of data, technology, and market infrastructure, today announced record open interest of approximately 84.5 million contracts on May 21, 2021, surpassing the previous record set on March 12, 2020.
/bit.ly/3oLk6PE

Regulation & Enforcement

How Regulators Killed Hedge Funds
Julie Segal – Institutional Investor
Hedge funds have fallen short on their promises — and new research expects that performance will continue to trail the broader market for at least the next five years.
Aggregate hedge fund performance has declined over the past decade, according to a research paper that will be published in the CFA Institute’s Financial Analysts Journal.
/bit.ly/3bUlhqB

Strategy

An Inflation-Proof Options Play That Bets on One Sector
Steven M. Sears – Barron’s
The first-quarter earnings season will soon be over, and the market narrative will likely shift from awe over the ability of companies to recover from the Covid-19 pandemic to shock over what may come next as the economy recovers.
Investors are already starting to focus on more pernicious themes, ranging from inflationary pressures to worries that the Federal Reserve will raise interest rates sooner than expected to keep the economy from growing too fast. Rising rates could be bearish for stocks.
/bit.ly/3bS6NHT

How a Simple Indicator Led Us to a Fast 102% Return (It’s Happening Again)
Nasdaq
“I have no clue what to do,” said a friend recently over backyard beers. “On the one hand, stocks are still rising. On the other, everything is pricey.”
I know you’re feeling my buddy’s pain–I get similar sentiments from readers of my Contrarian Income Report service all the time.
The last few weeks of wild swings sure don’t help. No doubt your finger has hovered over the buy button but you’ve hesitated, worrying you’re getting in at the top.
That’s understandable: no one wants to be the last buyer in a bull market!
/bit.ly/3fi1J1p

Events

Borsa Italiana: fourth edition of AIM Italia Conference starts today
Milan – 25 May 2021 – Euronext Press Release
Starting today until 27 May Borsa Italiana, part of the Euronext Group, organises the 4th edition of the AIM Italia Conference in a digital format.
This edition sees increasing numbers with the 67 AIM Italia companies and over 900 one-to-one meeting organised with institutional investors and nearly 200 meetings organised with analysts.
During the meetings companies can show their activities, goals and future growth strategies to investors and analysts.
More than 140 investors attending represent nearly 90 foreign and Italian investment firms. In particular, 56% of them is represented by Italian investment firms and 44% are foreign, including Switzerland (10%), Nordics (8%), France (7%), Germany (6%), UK (5%), Spain (3%), USA (1%) and other countries (4%).
/bit.ly/3hTRhPE

Miscellaneous

The World’s Best Chess Players Are Competing for Volatile Bitcoin Prize Pot
Callum Keown – Barron’s
When the world’s best chess players face off this week they won’t just be checking their opponents. They’ll also be checking the price of Bitcoin.
Sixteen grandmasters, including the top 10 in the world, are competing against each other and the clock in a typically tense, elite-level chess tournament—as anyone who has watched Netflix’s “The Queen’s Gambit” will know.
But there is a twist this time, as the tournament organizers have thrown the volatility of the world’s No. 1 cryptocurrency into the mix.
/bit.ly/3wCc2n5

Where Investors Are Putting Their Money as Inflation Concerns Grow
Evie Liu – Barron’s
Rising inflation expectations have been sending notable flows of money into assets that might benefit. Some are attracting more of that cash than others.
Funds invested in inflation-protected bonds, whose face value rises together with the consumer-price index, have seen strong inflows since last May, according to a Deutsche Bank report released on Friday. The amount of money that went into those funds over the past year was the highest since 2010.
/bit.ly/3bS8yVE

John Lothian Newsletter

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Past Options Newsletters

The Spread – July 30, 2021

The Spread – July 30, 2021

Earnings season in full bloom; Options lead year-to-date derivatives volume; Robinhood’s IPO; John gets real with Get Real VR: Conflicting factors underpin volatility; Cboe cleared for fall European competition; and the Cboe Options Institute’s Kevin Davitt talks about vega in this week’s “Term of the Week.”

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