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Europe called higher, silver receives Gamestop treatment

Equity markets enjoyed a bullish run in the first few weeks of January as sentiment was boosted by the prospects of Joe Biden going down the stimulus route. 

A $1.9 trillion relief package was announced by Mr Biden before he was inaugurated as the US president, global stock markets rallied as a result. All time highs were seen on the DAX 30, the S&P 500, the NASDAQ 100, while multi-year and multi-month highs were recorded on European and Asian markets. Equity valuations were lofty but the optimistic mood still circulated.

From time to time, the financial markets are given a rude awakening by an obscure situation or event, which is exactly what we saw last week. A swarm of retail investors, who were chatting with each other on Reddit, started snapping up Gamestop shares. It was known that relatively large short positions have been taken out against the stock, so the gang of retail investors were buying up the stock in a bid to create a short squeeze. The result was that Gamestop shares skyrocketed. A number of hedge funds incurred sizeable losses due to the monster rally. Other heavily shorted stocks like AMC Entertainment saw colossal moves higher too.   

Initially there was a feeling of surprise that a group of retail participants could end up inflicting such pain on big investment houses. Then concerns started to grow that funds would liquidate profitable positions in a bid to meet margin requirements for losing trades. Stocks fell across the board due to fears that some investment groups would adopt a cut and run policy.

Some of the fear was stemmed by the news that certain trading apps used to purchase the volatile stocks introduced restrictions or even blocked the opening of new positions. In some quarters of the market, there was outcry by the decisions but the brokerages cited regulatory and risk management procedures for the moves. On Thursday night, the trading apps eased up on some of the restrictions with respect to trading certain stocks. Fear returned to the markets on Friday as worries resurfaced that selected stocks would be in for a surge in volatility again.  

The herd mentality of the retail players ruffled the feathers of the old guard. It highlighted how much disruption could be caused when individuals band together. The regulator expressed concerns about the Reddit-retail investor situation. Seeing as some trading apps have curtailed activity on selected markets, it is entirely possible they will do it again, so we are less likely to see the manic moves that Gamestop witnessed last week. At the root of the frenzied buying has been companies that have been heavily shorted, US airlines saw some volatility last week which influenced European air carriers.           

The pandemic and reporting season took a back seat last week. Apple posted stellar numbers as quarterly revenue topped $100 billion for the first time but the stock lost ground on account of the wider bearish sentiment. Microsoft’s cloud business registered a 50% jump in revenue. Caterpillar saw earnings decline but it comfortably topped forecasts. Amazon and Alphabet will post their numbers this week.

Vaccination rates are in focus as it should give us an indication of which economies will re-open first. Britain is powering ahead in the vaccine race. In the region of 12% of the population has received the first dose. By contrast, Italy and Germany have rates of sub 3%. France’s rate is approximately 2%. The EU’s row with AstraZeneca hasn’t helped the situation. Due to constrain issues, the pharma giant will only be able to deliver approximately one-quarter of the 100 million vaccines they were supposed to deliver by March.  

President Macron of France revealed tougher restrictions to curb the spread of the virus but stopped short of introducing a third lockdown. The major economies of Europe are unlikely to be easing restrictions in the near term but, the UK is in the best position to unwind constraints.                        

Silver shone last week and overnight as the metal saw a rise in demand thanks to postings on Reddit – it was targeted like Gamestop. Gold was given a lift too.

At the weekend, China announced its official manufacturing PMI and non-manufacturing PMI reports. The manufacturing reading for January was 51.3, slightly ahead of economists’ forecasts, but it cooled from the 51.9 posted in the previous update. The non-manufacturing update was 52.4, down from 55.7 in December. Overnight, the Caixin survey of Chinese manufacturing was 51.5, while economists were expecting 52.6. The December reading was 53.

Even though US index futures initially traded lower last night, sentiment changed. Equity markets in Asia are showing solid gains and European indices are called higher too.

Lately, the US dollar has attracted safe-haven flows. The CMC USD Index recently hit its highest mark since 23 December 2020. According to Reuters the number US dollar short positions dropped last week for the first time in six weeks. Continued uncertainty in riskier assets like stocks, could see the greenback make further ground.        

As far as Western economies go, the US has had a good economic recovery but there have been some pockets of weakness. The advance reading of US GDP for the final quarter of last year was 4%. It was a sharp cool down from the 33.4% growth registered in the third quarter. It is encouraging to see the economy is still recovering but GDP is down roughly 13% since the end of 2019. The most recent jobless claims reading fell to 847,000 – the lowest in three weeks but back in November we saw reports that were below 720,000 so the labour market has clearly weakened recently. That was most evident in the December US non-farm payrolls report, which was -140,000, the first negative update in eight months. Friday’s jobs report is expected to show that 85,000 jobs were added in January.         

The harsh restrictions that are in many European countries are taking their toll on their respective economies. Last week, France, Spain and Germany posted fourth quarter 2020 GDP readings of -1.3%, 0.4% and 0.1% respectively. The levels of growth all topped forecasts but were all large declines on the third quarter. Seeing as this year started off similar to how last year finished in terms of restrictions, the subdued levels of economic activity are likely to continue. To make matters worse, the EU has been very slow to roll out vaccinations so therefore there aren’t too many hopes that governments will ease up on restrictions anytime soon.         

The German retail sales report for December is expected to be -2.6% on a monthly basis, which would be a big fall from the 1.9% growth registered in November. It will be released at 7am (UK time).

Between 8.15am (UK time) and 9.30am (UK time), the major economies of Europe will post their latest manufacturing PMI readings for January. Spain, Italy, France, Germany and the UK will reveal their figures, and economists are expecting 50.2, 52.5, 51.5, 57, and 52.9 respectively. The tougher restrictions seen recently has curtailed activity but expansion continues in all the reports nonetheless.

British lending data for December will be revealed at 9.30am (UK time). The Bank of England consumer credit report, mortgage lending and mortgage approvals are predicted to be -£1.1 billion, £5.59 billion and 105,000 respectively. 

The eurozone unemployment rate for December is tipped to hold steady at 8.3%, it will be posted at 10am (UK time).

At 2.45pm (UK time) the US manufacturing PMI report for January will be announced. 59.1 is the consensus estimate. Shortly afterward, the ISM manufacturing update will be posted, economists are anticipating 60.0, which would be a dip from 60.7 in December – the fastest rate of expansion since August 2018.        

EUR/USD – has been trading around 1.2127, the 50-day moving average, recently. While it holds above that level, the broader uptrend should continue and it could retest 1.2349. A break below 1.2058 should see it target 1.2000 or 1.1923.    

GBP/USD – since late September it has been in an uptrend, last week it hit a 33 month high. If the positive move continues, it could target 1.4000. A pullback might find support at 1.3505, the 50-day moving average.   

EUR/GBP – has been in a downtrend since mid-December and further losses might target 0.8800 or 0.8670. A rally from here could see it hit 0.8993, the 200-day moving average.   

USD/JPY – since early January it has been moving higher and it recently hit an 11 week high. While it holds above the 50-day moving average at 103.83, the bullish trend should continue and it might bring 106.00 into play. A move back through 103.83, could see it target 102.59.   

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