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Mood improves as fear of hedge fund fire sales fall

Stocks have largely recouped earlier losses as the fear that previously ran through the markets has dissipated.  

Most European equity benchmarks are set to finish higher after showing heavy losses earlier today. This morning the mood was fearful due to concerns that some hedge funds were frantically closing out positions in a bid to free up cash to meet margin calls requirements on short positions that have gone horribly wrong for them. Short squeezes were due to retail traders snapping up stocks like Gamestop. There was a fear that other investment firms might start dumping stocks just to exit the market. Sentiment in equities has since improved as those worries in relation to hedge funds have faded. It was announced that a couple of trading apps, that have been facilitating retail investors battle with certain hedge funds, have imposed restrictions on certain stocks. That has helped bring down the fear factor as the battle won’t be as intense now.          

Diageo surprised the market by posting a 1% increase in net organic sales in the first half. The consensus estimate was for a fall of 4.6%. The strong performance in North America, the group’s largest market, topped management’s expectations. The division is still expected to see robust momentum. Further disruption and volatility on account of the pandemic is expected but at the same time, on-trade and retail travel margins are expected to improve. Organic operating profit growth in the second half is predicted to be better than organic net sales in all regions. Not only is the drinks company cautiously optimistic, it announced an interim dividend of 27.96p, up 2%.         

Fevertree, the producer of the popular tonic brand, announced that it now anticipates full year revenue will be in the region of £252 million, which is an increase the £235-£243 million guidance that was issued in September. The drinks company confirmed that online and off-trade sales channels have been strong. Yearly group sales slipped by 3%. The established UK market suffered greatly as sales fell by 22%, while the rest of the world posted a 58% jump in sales.      

EasyJet issued a bleak near-term outlook but it is optimistic that business will pick up in summer. First quarter revenue and passenger numbers were dreadful as they fell by 88% and 87% respectively. The guidance for the second quarter is not much better as it expects capacity to be no more than 10% of the level achieved in 2019. Looking further down the line, the airline expects demand for travel will increase as mass vaccinations should prompt governments to relax their restrictions. Despite the dire outlook in the short-term, easyJet is aiming to have a record number of aircraft at Gatwick Airport this summer as they are banking on the release of pent up demand. The stock traded lower this morning but it is now in positive territory.            

In keeping with the aviation sector, Wizz Air revealed third quarter revenue of €149.9 million, down 76.5%. In the three month period, the underlying net loss was €114.5 million. Due to the uncertainty caused by the health crisis, no guidance was issued. The sector is facing major challenges in the near term due to lockdown but Wizz is very well financed so it should easily ride out the near-term turbulence. As of 31 December 2020, its cash balance was €1.2 billion. Earlier this month, the group raised an additional €500 million from a bond issue, so there are no worries from a liquidity point of view.      

Berenberg cut its price target for Fresnillo from 1,200p to 1,000p, while BMO lowered its price target for the silver and gold miner to 1,100p from 1,325p.  


The Dow Jones and the S&P 500 are have pulled back some of yesterday’s losses. Now that certain trading apps have tightened restrictions with respect to specific stocks, there is a feeling the swarm of retail traders has had their power diminished, which has brought some relative stability to the markets. In the final quarter of 2020, the US economy grew by 4%, meeting forecasts, but it was a sharp fall from the 33.4% growth registered in the third quarter.      

The mania surrounding Gamestop has cooled a little. The stock has been caught up in a frenzy recently as an army of retail investors has been snapping up the stock but it is currently down over 50%. A forum on Reddit is at the centre of the colossal moves that the stock has witnessed recently. Bed Bath & Beyond, AMC Entertainment and Blackberry saw large gains yesterday but are all lower today. 

Apple’s first quarter update last night was very impressive. The smartphone maker announced a quarterly revenue that topped $100 billion for the first time. It rose by 21% on a yearly basis to $111.4 billion, exceeding the $103.28 billion forecast. EPS was $1.68, which comfortably beat equity analysts’ expectations. From time to time there has been talk the high-end smartphone market is saturated and that Apple’s latest smartphones aren’t a whole lot different from previous models. Despite that chatter, iPhone revenue jumped by 17% to $65.6 billion. Revenues from iPads surged by 41%, while Mac and other product revenue rose by 21% and 29% respectively. Apple Music and Apple TV+ fall into the services division, and the unit posted revenue of $15.76 billion, up 24%.

Tesla delivered a mixed fourth quarter update last night. EPS was 80 cents and that was a big disappointment as traders were expecting $1.03. Revenue surged by 45% to $10.74 billion, slightly beating forecasts. Quarterly automotive gross margin was 24.1%, up from 22.5% one year ago. Tesla will start delivery of trucks this year, and annual vehicle delivery growth is expected to be 50%. The stock is down 3% today, which is relatively small when you consider how much the stock has rallied recently and not to mention that earnings greatly undershot forecasts.          


The US dollar index is now offside as there has been a large shift in sentiment. Earlier today, European stock markets and US index futures were deep in the red, but now the change in investor confidence has weighed on the dollar. The greenback has been a popular safe haven trade lately, so now the fear factor had cooled a little, the dollar has retreated. GBP/USD and EUR/USD have been helped by the dip in the dollar.


The gold market continues to be heavily influenced by the US dollar. The commodity is now up on the session thanks to the move lower in the US dollar – which happened around three hours ago. In the past week, the metal has been drifting lower, should the bearish move continue it might target $1,804.

The change in risk sentiment a few hours ago has pushed up the oil price, it is now showing respectable gains. When US index futures began to recover, WTI and Brent crude oil moved higher too as the overall negative sentiment in the markets waned. Demand woes could be on the horizon as Covid-19 cases in China are on the rise and the nation in hungry for energy so a resurgence of the virus will probably impact demand.       

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