Equities have bounced back strongly overnight from their falls last week amidst some signs that the market is moving on from the GameStop saga. The USD is stronger across the board, which has seen the NZD drift down to 0.7160. Elsewhere, the Reddit crowd helped drive silver prices to their highest level since 2013.
Equity markets have rebounded to start the week, with the S&P500 up 1.7%, the NASDAQ 2.5% and European indices 1-1.5%. Last week’s losses in equity benchmarks were widely attributed to deleveraging amongst hedge funds and other leveraged investors, some of which incurred large losses from the surge in GameStop and other unloved stocks. But there are signs that the deleveraging is already well advanced, with Bloomberg reporting that short interest in GameStop had been slashed, to 40-50% of the amount of stock on issue, compared to more than 100% in mid-January. In another tentative sign that the market may be moving on from the Gamestop saga, share prices amongst those stocks favoured by the retail trading crown have diverged overnight, rather than moved in unison (GameStop shares are down more than 20% whilst others, including Cinema chain AMC, have moved higher). The VIX index of implied equity market volatility has drifted lower, to around 30, although it remains higher than it was a fortnight ago.
Market attention is starting to refocus on other themes, including US fiscal stimulus, vaccine roll-out and corporate earnings (Amazon and Google’s parent Alphabet are amongst those to report tomorrow). A short while ago, President Biden and VP Harris met with a group of 10 centrist Republican senators to discuss the latter’s $600b fiscal stimulus counterproposal. The price tag on the Republican senators’ stimulus is much lower than the $1.9tn for Biden’s plan. Biden has expressed a preference for a bipartisan fiscal deal although, if that fails, the Democrats can still push through large parts of their stimulus using a process called budget ‘reconciliation’, which only requires 50 votes in the Senate. Senior Democrat Pelosi said the House would take the first step towards budget reconciliation next week, putting pressure on the Republican senators to make concessions.
Adding to positive market sentiment, BioNTech and Pfizer said they would increase production capacity for their vaccine, allowing for 2b doses to be produced this year, up from the previous estimate of 1.3b.
In currencies, the USD has strengthened across the board overnight, rising against all the G-10 currencies. The BBDXY index is up 0.3%, and on track for its highest close since early-December, while the DXY has risen 0.5%.
European currencies have led declines, with the EUR down 0.6% to 1.2065, near its year-to-date lows. Concerns over the slow vaccine roll-out in Europe, despite AstraZeneca’s pledge to deliver an additional 9m more doses by the end of March, are weighing on market sentiment towards the EUR. Meanwhile, German retail sales in December was a shocker, falling almost 10% on the month as the country went back into lockdown.
Commodity currencies fared better but are still down against the USD overnight. The AUD is down 0.2%, to 0.7630, while the NZD is down 0.4%, to around 0.7160, despite the rebound in equity markets. The NZD and AUD are usually correlated to equities, although the episode over the past week appears to be an idiosyncratic issue with market positioning in equities rather than a broader retrenchment in investors’ risk appetite.
In economic data, the US ISM manufacturing survey was weaker than expected, although it remains at a lofty 58.7. The underlying components of the survey were mixed, with the key New Orders index falling 6 points, to a still-high 61.1, while the Prices Paid component rose to its highest level since 2011 (likely reflecting, in large part, recent strength in oil and other commodity prices). The Chinese Caixin Manufacturing PMI was also weaker in January, echoing the fall in the official PMI over the weekend and suggesting some loss of momentum in the manufacturing sector.
The bond market has shown little movement overnight to both the gyrations in equities and economic data. The US 10-year Treasury is unchanged compared to the end of last week, at 1.07%. Yesterday, the NZ curve steepened, with the 10-year swap rate rising 4bps, to 1.22%, its highest level since March, while the 2-year rate remained unmoved, just above 0.3%. Trading activity was thin in the local rates market yesterday given the Auckland Anniversary holiday.
Finally, Silver reached its highest level since 2013 overnight, just above $30/ounce, after the Reddit/retail trading crowd turned its attention to supposed large short positions in the precious metal. Silver has retraced a little, to around $29, but is still up more than 7% overnight. There was little spill over to other commodities, with gold up less than 1% overnight and copper falling slightly.
The RBA Board meeting takes place today although the market will likely need to wait for Governor Lowe’s speech tomorrow and parliamentary testimony later in the week for policy guidance. The RBA’s $100bn QE program is due to expire at the end of April (our NAB colleagues expect a six month, $50b extension) while the 3yr Yield Curve Control framework has been in place for almost a year now.