Market news 1 February 2021

The market tone sours

• Equity markets were distracted this week by an “old versus new” battle with US videogame company Gamestop as the focal stock. Amateur traders sent Gamestop shares soaring as much as 700% throughout the week as they gathered on social media platforms including Reddit to take opposing positions against hedge fund short sales. Robin Hood and Trade212 were among the online trading platforms that imposed limits on trading as retail investors flocked to the market. Market regulators have warned against the dangers of market manipulation, but restrictions on retail trading caused some to question the legitimacy of financial market access.
• The equity markets had their worst week since last October, in part due to COVID but also in no small way due to the uncertainty injected by the “Reddit short squeeze” phenomenon, with most major global indices down 3-4%.
• Despite the equity market weakness, US and euro rates were only marginally lower, whilst UK gilt yields actually rose very slightly. Credit spreads were modestly wider. GBP was the top performing currency in the G10 in the month of January thanks to the relative efficacy of its vaccine rollout.

Business and consumer confidence surveys weaken slightly

• The German Business Climate Ifo survey was worse than expected in January, falling from a revised 92.2pts reading to 90.1pts over the month (consensus: 91.4). The current conditions reading dropped from 91.3pts to 89.2pts as further lockdown measures were introduced on 19th January to control rising COVID infection numbers. The forward-looking expectations index dropped from 93.0pts to 91.1pts, the worst reading seen since May 2020. GDP across the euro area is expected to shrink in Q1.
• The US Consumer Conference Board Index increased by 2.2pts to 89.3 in January after two months of consecutive decline. However, it is well below the pre-pandemic level of 132.6 (Feb 2020) and even the 101.4 reading seen in October of last year.
• The US Richmond Fed Manufacturing Index fell to 14.0 in January (December: 19, consensus: 19). Shipments and new orders were both weaker over the month, -2pts and -12pts respectively), whilst the employment component increased +3pts to +23.

Fed follows ECB in waxing dovish, Bank of England up next

• The FOMC left the US policy rate at the zero bound at their meeting on 26-27 January. They reiterated the three criteria that will need to be met before a range hike is considered; 1) labour market at maximum employment, 2) inflation to reach 2% target, 3) committee confidence that inflation is on track to stay sustainably above 2% for some time. Hence, they make it clear that rate hikes are still a long way off. The FOMC also said that it was too early to reduce the $120bn monthly asset purchases at this stage.