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News

Equities fall, short squeezes spread, Fed in focus

What started out as a dull trading session has become livelier as the day has progressed. 

Europe

The mood was originally slightly downbeat due to concerns that government imposed restrictions would derail the chances of a robust economic recovery from the pandemic. In 2021, several countries either extended lockdowns or introduced tighter restrictions. For the time being, there is not much hope that things will ease up on the restrictions front.

A number of hedge funds have been in the news recently as they have had to liquidate short positions in Gamestop, which saw a colossal rally. There is speculation the investment group’s suffered large losses on those trades. Fears are circulating that some investment funds might be quickly closing out positions as a way of shoring up their cash positions. It is early days yet but we might see selling pressure ramp up for fear there could be a stampede for the exit.

The Federal Reserve is expected to keep their policy on hold, the interest rate decision will be posted at 7pm (UK time). Last month, the Fed confirmed the asset purchases will be at least $120 billion per month. Even though the US recovery has a long way to go, there is already chatter of a taper tantrum, so the Fed is unlikely to say anything that would spark those fears. At the same time, the US central bank won’t want to give off the impression that they are overly keen on boosting the existing stimulus scheme, so it will be a balancing act for Jerome Powell, the Fed chair.          

Pearson shares are in high demand today even though there have been no news articles relating to the stock. Over in the US, Gamestop shares have seen a surge in volatility recently as there has been a raging battle between the short sellers and retailer traders. A large portion of Gamestop’s shares have been shorted, so that made the upward move much more pronounced. For a London-listed company, there is a relatively high level of short interest in Pearson, so it is possible that traders are snapping up its shares in a bid to pressure the short sellers.

LVMH shares were a touch higher earlier on the back of the group’s well received fourth quarter update that was announced after the close of trading yesterday. The wider bearish sentiment has weighed on the stock. Like-for-like (LFL) sales fell by 3% to €14.3 billion, meeting forecasts. Yearly LFL sales dropped by 16% to €44.65 billion. An on annual basis, net profit slumped by 34% to €4.7 billion, but easily beat equity analysts’ forecasts. The high-end goods firm had a tough time in 2020 as it is reliant on wealthy tourists purchasing items from its stores. Travel restrictions, not to mention lockdowns, hurt the group. China’s emergence from the coronavirus crisis has greatly helped LVMH as it is a key market for the company. Fourth quarter LFL sales in Asia, excluding Japan, rose by 21%. Sales registered 5% growth. Even though business conditions in the past 10 months have been difficult and that uncertainty persists, LVHM raised its dividend by 25%.

Fresnillo shares have slipped to their lowest level since July. The mining company’s shares have been drifting lower since August, when gold hit a record high and silver notched up a seven year high. This morning, the miner confirmed that annual silver and gold production fell by 2.9% and 12.1% respectively. Due to a landslip at a gold mining site, Fresnillo lowered its 2021 gold production guidance.                          

US

The major indices are in the red as sentiment has turned sour. Dealers are happy to take some money off the table seeing as stock markets racked up record highs recently. Fears that hedge funds are keen to cut and run has seeped into the wider mood of the markets.   

GameStop shares are experiencing enormous volatility once again. The stock’s violent swings were as a result of hedge funds taking aggressive short positions in the company and then retailer investors started to snap up the shares. Today, it was reported that one of the investment funds has closed out its position in the company, while another has covered the majority of its holding. This could pave the way for a dip in volatility. It might also act as a lesson for hedge funds who prey on companies that are perceived to be weak.

AMC Entertainment, Blackberry, and Bed Bath & Beyond also have relatively high levels of short interest. The stocks seem to be getting the GameStop treatment, AMC is up over 200%. 

Microsoft posted strong results last night, hence the rise in the stock. Equity analysts were expecting EPS to be $1.64 but it came in at $2.03. On a year-on-year basis, revenue rose by 17% to $43.08 billion, easily topping the $40.08 billion consensus estimate. It was the first time that quarterly revenue exceeded the $40 billion mark. The monster jump in the number of people working from home greatly helped the firm, as Azure cloud and the Personal Computing business, saw sales rise by 50% and 14% respectively. Traders will be keeping an eye on Apple and Facebook as they will post their numbers after the close of trade tonight, so will Tesla.

Boeing’s net loss for 2020 was $11.9 billion, a record for the company. In the fourth quarter, the net loss was $8.4 billion, which was a massive increase on the $1.01 billion loss registered one year ago. Revenue in the final three months dropped by 15% to $15.3 billion, which was fractionally ahead of estimates. The group’s defence and security division has become increasingly important, and it registered a 14% rise in revenue, which helped offset the wounded commercial airline unit.              

FX

The US dollar index is up more than 0.3% as the currency is attracting safe-haven flows. Fear is doing the rounds this afternoon so the greenback’s popularity has risen. The underwhelming durable goods report for December, which showed 0.2% growth, has been overlooked as the risk-off attitude has taken precedence. GBP/USD and EUR/USD have been pushed into the red on account of the dollar’s upward move.  

Commodities

Gold is showing a relatively small loss today as the rally in the US dollar is weighing on the commodity. The yellow metal is traded in dollars, so the firmer greenback has pushed it into the red. Some traders flock to gold when equities are under pressure so the metal’s decline is most likely being cushioned today.

WTI and Brent crude oil are now showing gains on the day in the wake of the EIA report, which showed a huge fall in inventories. According to the report, US oil stockpiles dropped by 9.9 million barrels, by contrast, the consensus estimate was for a build of 430,000 barrels. The update paints a picture of higher demand.


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