Weekly Market Commentary (January 25– January 29)
Global Market Highlights
US equities declined for the week as volatility jumped due to short squeezes ruling investor sentiment. Wednesday proved to be the worst day since October, as the S&P 500 index dropped 2.6%. Despite a busy earnings week, earnings did not drive market sentiment. Unusual fluctuations in the prices of stocks such as Gamestop and AMC Entertainment appeared popular with individual investors, which drove investor sentiment and received huge media attention. Retail investors encouraged by Reddit and other online forums, targeted stocks with high percentages of short interest through buying the shares and cheating the Wall Street hedge funds. Gamestop gained close to 200% during the week as these individual investors kept on pouring cash in the stock.
The Federal Reserve held its January policy meeting and in the press conference , policymakers reinforced the rhetoric that the economic outlook remains uncertain and that it will be some time before the central bank begins to taper its asset purchases. Q4 GDP came in at a 4% gain, which matched analyst expectations.
Shares of European companies also fell for the week as worries emerged that the economy could slow due to the pandemic and delays in the distribution of the vaccines. The European Stoxx Europe 600 index dropped 3.11% for the week, while the German Dax 30 index shed 3.28%, and the Uk’s FTSE 100 index lost 4.3%.
The European Commission said it would implement a mechanism allowing EU countries to block exports of vaccine doses if their purchase orders had not yet been fulfilled. The measures came after setbacks in coronavirus vaccine production at Pfizer and AstraZeneca resulted in severe supply shortfalls, prompting health authorities in Spain, France, and Germany to scale back inoculation programs.
Spain, France, and Germany reported their GDP numbers this week for Q4, which seemed resilient, showing signs that the eurozone might avoid a deeper recession. The Spanish economy expanded by 0.4% driven by increased household spending. In France, the economy shrank 1.3%, which was an upside surprise relative to consensus estimates that predicted a 4.1% contraction. Germany’s economy grew at a 0.1% rate thanks to stronger exports and construction, however, due to continuing lockdowns, the German government cut its 2021 forecast for GDP growth to 3% from its previous estimate of 4.4%. Bright spots for the French economy in Q4 included robust exports, steady business investment, and a rebound in consumer spending.
In Italy, the prime minister resigned after losing a parliamentary majority earlier this month and struggled to attract support for his minority administration. Giuseppe Conte is expected to forge a new coalition, which could allow him to be reappointed as prime minister.
Asian markets fell for the week as the Japanese Nikkei 225 index dropped 3.4%, while in China the Shanghai Composite Index fell 3.4%, while the CSI 300 shed 3.9%.
The Japanese government, seeking to swiftly implement measures to curb the third wave of the coronavirus infections, approved a third supplementary budget representing JPY 19 trillion. Prime Minister Yoshihide Suga dispelled the idea of another round of government stimulus checks; the government issued JPY 100,000 to all of its 126 million residents after the first virus emergency in April 2020. The fiscal 2021 budget, totaling a record JPY 107 trillion, is expected to be approved in March. The Japanese government may extend the state of emergency beyond February 7th for parts of the country that continue to report high numbers of new cases. The Tokyo metropolitan area again reported more than 1,000 new cases per day following a downward trend over the past week.
In China, stocks recorded a drop as fears that the country’s central bank is turning more hawkish after it drained $12.1 billion in liquidity from the financial system were increasing. A senior central bank official also warned of a potential asset bubble. Southbound equity flows from mainland China to Hong Kong reached a record high during the week, driven by a large number of mutual funds putting cash to work at a time when Hong Kong offered large arbitrage opportunities in Chinese dual-listed shares. Hong Kong’s benchmark Hang Seng Index hovered near a 20-month high. Hong Kong has benefited as the exchange of choice for mainland Chinese companies seeking to go public, particularly for domestic tech firms and U.S.-listed Chinese companies seeking a secondary listing. Last year, mainland Chinese companies accounted for 98% of Hong Kong’s initial public offerings, up from 73% in 2019 and 51% 10 years ago.
In economic news, China reported that industrial profits rose 20% in December from a year ago and increased roughly 4% for the full year after a slight decline in 2019. Next month, China celebrates its weeklong Lunar New Year holiday, albeit with tighter restrictions on traveling and gatherings as officials try to contain new virus outbreaks. This year’s restrictions are more targeted than the widespread lockdowns in 2020, however, making it unlikely that they will have a big impact on the broader economy.