Weekly Market Update 29/01/2021

Equities suffered their biggest weekly loss in three months last week as volatile trading continued in some areas of the market. President Joe Biden has experienced a resistance against his $1.9 trillion fiscal stimulus package, leading to concerns it will have to be diluted to get passed, whilst Europe publicly strains with the rollout of vaccines.

U.S. stocks fell % over the week, with U.S. technology stocks falling 1.5 %. European stocks lost 2.2%, while UK stocks fell 3.2%, although much of the pain was in high-yield stocks, which suffered from the continued strength of sterling as the currency rose to $1.37 and $1.12 against the dollar and euro, respectively. Japanese stocks fell 2.6% and Australian stocks lost 2.8%.

Emerging markets fell 3.0%, with domestic Chinese stocks down 3.4% and Hong Kong stocks down 4.0% as the People’s Bank of China withdrew $23.2 billion in liquidity from the market to try to protect against asset bubbles from forming in the markets.

Haven assets like US Treasuries rose this week, with the yield on 10-year German government bonds, which moved inversely, temporarily falling below 1% and now trading at 1.07%, with 10-year German Bunds trading at -0.51% and UK Gilts at 0.32%.

Market volatility has increased despite the strong start to the company’s earnings season. Of the 34% of companies included in the main US equity index, 82% have exceeded earnings expectations, with an average earnings per share outperformance of 19%. Not as many companies have published results in Europe, of those that have, earnings have followed a comparable pattern, with 62% exceeding expectations with an average earnings per share outperformance of 20%.

The US stock market suffered its worst sell-off since October 2020 on Wednesday, due to concerns President Biden’s fiscal package needs to be diluted to enforce it, and disappointing news about the introduction of vaccines in many countries, particularly Europe. This has led to a high-profile disagreement between pharmaceutical company AstraZeneca and the European Commission over the anticipated delivery of Covid19 vaccines in the first quarter of 2021 relative to the volume ordered, with a major shortage probable.

The introduction of the vaccine in Europe became even more complicated when the German Vaccination Committee decided AstraZeneca’s vaccine should only be provided to people under 65, while they found inadequate trial data for more mature age groups.

Market volatility is worsened by well-organized retail investors who use online message boards like Reddit to target hedge funds that are shorting individual stocks. By purchasing heavily shortened stocks and driving up stock prices, these retail investors forced many hedge funds to close their short positions as their losses mounted. Retail investors will gain if the share price continues to rise, as hedge funds attempt to cover their short positions by buying shares. One high-profile hedge fund, Melvin Capital, lost $3.7 billion in the first three weeks of January as a result of such a targeted ploy by retail investors.

The information contained in this article is believed to be correct but cannot be guaranteed. Past performance is not a reliable indicator of future results. The value of investments and the income from them may fall as well as rise and is not guaranteed. An investor may not get back the original amount invested. Opinions constitute our judgment as at the date shown and are subject to change without notice. This document is not intended as an offer or solicitation to buy or sell securities, nor does it constitute a personal recommendation.