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GameStop turmoil triggers margin call sell-off

Last night’s US Federal Reserve rate decision was somewhat overshadowed by big surges in the so-called Reddit stocks, and the sharp slide in US and European equity markets yesterday, which prompted large swings in pricing and volatility.

While European markets came under pressure, US markets also fell sharply, with the Dow posting its biggest one day fall since October, a fall that is likely to see European markets open lower this morning.

Not even a record-busting quarter for Apple, who posted a new high $111.4bn in revenues, appears to have been enough to stem the current weakness. If investors were hoping that the Fed were going to come to the rescue last night, their hopes were quickly dashed simply because last night's sell-off may well have simply a case of cause and effect.

In short (pun intended), large hedge-fund short positions were being liquidated, prompting margin calls and the cashing out of more profitable positions to fund the losses being caused by the Reddit surge in the likes of heavily-shorted stocks like GameStop, as well as AMC Entertainment, owners of Odeon Cinemas among others, which have seen huge gains, amid big eye-watering price swings.

While few people are shedding many tears about large-scale hedge-fund losses, after all if you play with fire, be prepared to get burned, the market turmoil is highlighting a number of areas within the market that might prompt regulatory scrutiny in the future, namely the monitoring of retail trade chat forums and message boards, and how they drive markets. With large numbers of small investors swarming over heavily-shorted stocks in what looked like a coordinated move, the frenzy raises all sorts of questions with respect to possible market manipulation. It is already illegal for institutions to coordinate in the manner currently being seen in moving prices on these stocks, raising questions about the legality of what is currently taking place right now on these forums. Regulators have already said that they are monitoring what is going on, raising the possibility of further action if it causes further market instability.

Fed chief Jay Powell struck a cautious note on the US economy, reinforcing the guidance of December, but also saying that the recovery had weakened, and was a long way from a full recovery, making it even more important that the central bank stayed the course. The Fed said the recovery would be very dependent on the vaccine rollout, as well as the risk we could see other new variants.

US markets finished the day sharply lower, dragged down in some respects by some disappointing earnings announcements from the likes of Boeing, as well as concern over the huge speculative gains being seen in some of the most heavily-shorted companies on the New York stock exchange. Yesterday’s volatility in the US saw ripple out effects here in the UK and Europe, with big gains in the most heavily-shorted UK stocks, as well as also helping to overshadow the unseemly squabble between the EU and AstraZeneca over the delivery of a vaccine that the EU Medicines Agency hasn’t even approved for general use yet.

The differences of opinion are particularly concerning given that there are increasing signs that countries across Europe are struggling to contain the virus, with the UK admitting that schools were unlikely to open before 8 March, while in Spain the authorities in Madrid suspended vaccinations due to supply constraints. This move by Spanish authorities perhaps helps to explain the behaviour of the EU in lashing out, as their procrastination in signing a deal with AstraZeneca, three months after the UK, comes back to bite them. The last thing the people of Europe need is for vaccine nationalism to kick in on the part of EU politicians, who appear to be trying to deflect from their own political incompetence, by trying to pick a fight with a pharmaceutical giant who are supplying a vaccine candidate at cost.

Having seen the year get off to such a positive start, the change of mood this week is a little concerning, as the early optimism of week one of 2021 has given way to concerns as to when we are likely to see an end point to the pandemic, as well as when we might reasonably expect to see the prospect of an economic rebound. On the economic data front, we should get an early indication of how much the US economy slowed in Q4, as US lawmakers bickered throughout the quarter about a new fiscal stimulus plan. These disagreements are likely to have depressed consumption, which in turn is likely to have weighed down on the US economy after the strong showing in Q3. One of the main reasons Q3 GDP was so strong was because personal consumption came in at 41%.

Today’s Q4 GDP numbers are likely to be much weaker, for the same reason. Personal consumption accounts for over two thirds of US GDP and the slowdown in November and December is likely to reflect a rather weak end to 2020. Expectations are for annualised Q4 GDP to come in at 4.3%, a sharp slowdown from the 33.4% seen in Q3. Weekly jobless claims are also expected to improve from last week, coming in at 880,000, down from 900,000 last week.

EUR/USD – looks to have broken down slipping below the 50-day MA, but we need to break below the 1.2040 area to signal the potential for a move towards the 1.1980 area initially on the way to the 1.1800 area. Resistance is now likely to come in at the 1.2190 area.

GBP/USD – despite a marginal new peak at 1.3759 the pound has slipped back however it still looks set for the move towards 1.4000. The 1.3600 area yesterday still remains a key support, with a break below targeting 1.3450.  

EUR/GBP – continues to look soft with another new 8-month low at 0.8812. The potential for further losses towards the 0.8780 area and even lower remains while below the 0.8920 area.

USD/JPY – a strong rebound has seen the US dollar surge up towards the 104.30 area, but we need to take out the 104.50 area to target a broader move higher. This area is a key barrier to further gains towards 105.20.

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