INSIGHTS

Duncan Donald

Fri, Jan 29


Heightened Volatility brings risk aversion to global stock markets

It has been another extremely volatile week in the markets as we have come to expect. But as we end the week, the headlines in the markets are more on the emerging theme of the Retail trader taking on the might of the Hedge Fund community. The practice that seems to have been employed in the US markets, is factions formulating on internet forums such as Reddit and using collective purchasing power to inflate the price of flagging stocks such as Gamestop. The flash mob style purchases targeted flushing out the short positions taken by Hedge Funds based on formal analysis, but ultimately when the price gets forced too high, a disciplined good practice infers that the Hedge Funds must cover the shorts bringing another wave of buying to the markets. This was repeated over a number of US stocks later in the week and brought unforeseen volatility to a market that didn’t need it, thus a flight to de risk and deleverage.

 

Naturally, the practice could not go unnoticed and with an increase of leveraged trading on Retail platforms, the Banks which act as liquidity providers for Brokerages such as RobinHood demanded increased margin on assets which had seen moves of up to 1000% in a few days meaning the brokers limited the ability to buy with sell only on held assets being the only option on most Retail platforms on Thursday. Naturally, this brought outcry from the Retail community with at least one lawsuit filed against Robinhood to date. However, with global regulators looking in, the monitoring of those faceless names of forums will be closely monitored for insightful market manipulation and with volatility on the targeted assets at incredible highs margin will ultimately price out leveraged trading.  Such collective market manipulation brought prison sentences and heavy fines to the banking communities in the last 10 years so the practices exhibited in the last few weeks will likely be top of the regulator’s agenda in the coming weeks.

 

The instability brought by the above weighed heavy on the indices yet not always in a straight line with some incredible daily volatility. Coupled with the global increase of Covid-19 cases and incredibly slow distribution of vaccines stocks were turning despite a broadly strong earnings season Stateside. Indeed, the strong numbers seen did little in the way of upside stimulate as stocks weighed heavy as it looked likely we could see a modest pullback before the value and dip buyers roll up their sleeves and jump back in. So, for now we remain sympathetic to a downside move but feel the overall trajectory will be to the upside into the end of Q1. The one piece of news that did raise concerns was from the German Finance minister, who indicated that in a primary discussion with newly appointed US Treasury Secretary Janet Yellen that they were looking at a global tax on big tech companies. Whilst this was part of US President Joe Biden's manifesto, its thought this would be further down the priority chain given the current global situation, should this start to gain more prominence, this would severely dent FAANG stock which ultimately dominate the US indices, so for now this is one to keep an eye on.

 

As previously mentioned, the distribution of Covid vaccinations has disappointed in the US. But at this time Europe seems to have a distinct issue with some countries having not even begun vaccinations. The Eurozone hindered by political turmoil in Holland and Italy does not need further disruption and Germany's demand to block EU suppliers from delivering vaccines could set a president that would lead to severe disruption and disharmony. For now, the Euro remains our favoured currency short position with the delay and logistics of the vaccine rollout perhaps detracting from the blocs ability to emerge from the severe lockdowns that are being endured. In the UK, whilst the horrible 100,000 death figure was reached and breached and new cases remain around 20,000 a day with no likelihood of emergence from lockdown until the 8th of March as was announced by Boris Johnson this week, life beyond Covid is starting to seem more probable. Case numbers have significantly fallen and the vaccine rollout is growing at a consistent rate with news of a UK approved product coming late this week. Therefore, with the US Dollar remaining strong amidst risk aversion the Pound is outperforming the Euro against the USD so for now we hold firm in our EUR/GBP view into the new month. 

 

Next week brings a host of PMI data across the globe with interest rate meetings from Australia and the UK. Also watch for Joe Biden’s stimulus plan being discussed in the Senate and of course US Non-Farm and Unemployment rate data on Friday. 

Have a good week!

The Week Ahead: 

 

Monday - A busy start to the week with Manufacturing PMI from China Manufacturing and Non-Manufacturing. The Manufacturing PMI continues in the European session with firstly the Australian then Spanish, French, Italian and German. We also get Swiss and German Retail Sales and Italian Unemployment.  From the UK we get Mortgage Approval and Net Lending data. In the US session we get ISM Manufacturing data and hear from the FED’s Bostic.  

 

Tuesday - We start with the Interest rate decision from the Reserve Bank of Australia. In the European session we get the UK Nationwide House Price Index. Later in the AM its French CPI, Spanish Unemployment and Italian and Eurozone GDP.  IN the US session its relatively quiet with no data till New Zealand's Employment and Unemployment rates. 

 

Wednesday - Starts with the RBA’s Lowe talking before China’s Caixin PMI data. In the Eurozone we get Service PMI from Spain, Italy, France, Germany, Eurozone bloc and the UK, as well as Eurozone CPI. Stateside we get ADP and Services and ISM Services PMI before the Fed’s Evans speaks late on. 

 

Thursday - From New Zealand we start with ANZ Business Confidence before the same data from NAB in Australia and the country's Trade Balance. Next up is UK Construction PMI and Eurozone Retail Sales. At lunchtime it's the UK Interest Rate decision time from the BoE. In the afternoon we get US Unemployment Claims and Factory Orders and later on the RBA’s Lowe speaks again. 

 

Friday - We start with Australia’s RBA’s Monetary Policy Statement and Retail Sales. From the Eurozone we get German Factory Orders, French Private Payrolls and Trade Balance as well as Italian Retail Sales. From the UK we get the Halifax House Price Index. In the US session we get US and Canadian Non-farm Payrolls, Unemployment, Average Earnings and Trade Balance data. 

 


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