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Please see this weeks Markets in a Minute update from Brewin Dolphin:

Trading frenzy sees US equities post worst week since October.

Global equities posted sharp declines last week, as heightened volatility added to fears about the efficacy of the vaccine roll out. The S&P 500 recorded its worst week since October, falling 3.74%. The trading frenzy in GameStop and other targeted stocks led to the VIX, or ‘fear gauge’, ending the week at 32.4, well above its historical average. This fed through to Europe, where the VSTOXX, another measure of volatility, climbed to its highest level in almost three months. The FTSE 100 slid 4.3%, while the Dax declined by 3.79%. Investor jitters also affected stock markets in Asia, with the Nikkei down 4.63% and the Hang Seng down 4.39%. In China, where there are growing fears of a stock market bubble, the Shanghai Composite slipped 3.61%.

Last week’s markets performance*

  • FTSE100: -4.30%
  • S&P500: -3.74%
  • Dow: -3.70%
  • Nasdaq: -3.91%
  • Dax: -3.79%
  • Hang Seng: -4.39%
  • Shanghai Composite: -3.61%
  • Nikkei: -4.63%

*Data from close on Friday 22 January to close of business on Friday 29 January.

Markets rebound from last week’s rout

US equities rounded on Monday, posting their biggest rally in ten weeks, after analysts said the explosion of speculative buying would not cause a significant setback for markets. Tech stocks performed particularly strongly ahead of Tuesday’s earnings figures from Amazon and Alphabet. The S&P 500 climbed 1.6% and the Nasdaq jumped 2.6%.

Wall Street’s strong open led to the FTSE 100 closing up 0.9% on Monday, with JD Sports Fashion rising 7% to 799p on news it has agreed to buy American rival DTLR Villa. Retail investors turned their attention to silver, which hit $30 for the first time since 2013. The pan-European STOXX 600 increased 1.2%, with shares of miners surging by between 5% and 20% on the back of silver’s rise.

The FTSE 100 was up 0.6% in early trading on Tuesday, on growing hopes the US will agree an economic stimulus package. Virgin Money was one of the strongest gainers, rising 2.7% after announcing it had returned to profit in the first quarter.

Short squeezes dominate the headlines

In ordinary circumstances, last week would have been dominated by the raft of quarterly financial results from major S&P 500 stocks. Instead, the bulk of investor and media attention was on extreme fluctuations in the prices of small retail stocks. GameStop posted a weekly gain of 400%, resulting in major losses on short positions.

Trading in heavily shorted names resulted in historic trading volumes, with more than 23.6 billion shares of US stocks exchanged on Wednesday, according to Bloomberg. The Goldman Sachs Hedge Industry VIP index, which seeks to replicate the favoured long positions of hedge funds, suggests hedge funds have had to trim their longs to cover losses or deleveraging on their short books.

After Robinhood and other brokers restricted trading on Thursday, the US Securities and Exchange Commission announced it would review the restrictions and that it was “closely monitoring and evaluating the extreme price volatility”.

The trading frenzy overshadowed the generally good start to the US earnings season. We are about a third of the way through the season and, so far, 80% of companies have beaten expectations. Microsoft, Apple and Facebook all released strong quarterly results, yet Apple and Facebook declined by around 5% last week, while Microsoft edged up 2.4%.

Economic data continues to disappoint

Last week saw grim economic data from several countries around the world. Although the US economy experienced a strong rebound in the second half, this wasn’t enough to prevent it shrinking in 2020 for the first time since the financial crisis. Growth is expected to pick up once the pandemic is under control, but there is still a long way to go. Consumer spending slowed to 2.5% in the fourth quarter, down from a 41% rebound in the third quarter. Overall spending on goods also slowed.

Across the pond, UK retail sales for December were lower than expected, rising by just 0.3% versus a 1.2% forecast. In 2020 as a whole, retail sales plunged by 1.9%, marking the worst year for consumer spending on record. The strong pound also weighed on the FTSE 100, which derives around 70% of its earnings from overseas. Pearson was one of the few bright spots, rising by 13.7% last week.

Continuing lockdowns resulted in the German government cutting its 2021 GDP growth forecast from 4.4% to 3%, despite the economy expanding by 0.1% in the fourth quarter. France’s economy shrank by 1.3% in the fourth quarter, but this was better than expectations of a 4.1% contraction.

Vaccine roll out in jeopardy

Concerns about the economic impact of the pandemic and slow vaccine roll out continued to weigh on major European stock markets last week. The EU’s vaccination strategy is in disarray and many countries have had to suspend vaccinations because of shortfalls. Rolling out the vaccine is seen as a critical part of global economic recovery.

The World Bank has warned of double-dip recessions in Japan, the eurozone and the UK, partly because of ongoing lockdown measures. In Japan, three quarters of companies across 32 industries have trimmed their capital expenditure plans by an average of 2.9%, and manufacturers have reduced their forecasts by 3.8%.

Data released yesterday also signalled a slowdown in China’s economic recovery, with the Caixin manufacturing PMI falling from 53 to 51.5 in January, the lowest level since July. The official manufacturing and non-manufacturing PMIs also fell by more than expected. This came after a week in which a senior adviser to China’s central bank warned of the increasing risk of an asset bubble unless monetary policy was not tightened.

More positively, the International Monetary Fund has upped its global economic growth forecast by 0.3 percentage points to 5.5%, although it warned emerging markets’ limited access to vaccines could harm global financial stability.

As market volatility continues, please keep checking back for further market commentary and updates shared by us to help keep you informed.

Andrew Lloyd

03/02/2021