Markets settle down after Reddit frenzy
The Reddit-mania appeared to be running its course overnight as clearinghouses squeezed collateral requirements for enabling brokers. GameStop and silver slumped along with some of the Spanish Revolution’s other favoured stocks. From here, obscurity beckons, especially with Treasury Secretary Yellen summoning stakeholders for a fireside chat about the whole business.
That has allowed markets to get back to business as usual, which means of course, following the Biden stimulus package’s progress through the US Senate. The tabling and reconciliation process started yesterday, with Democrats showing a united front, with only the minimum wage facing some centrist senators’ objections. That was enough to inspire the buy everything herd to do just that, boosted by strong results from tech titans Alphabet and Amazon.
Last week’s handwringing about the stimulus package and slow vaccine rollouts and the ensuing delay to the global recovery highlights the market’s schizophrenic nature in 2021, which desperately searches for a new theme to hang its hat on. The oldies are the goodies though, and nothing beats a good dose of US fiscal largesse, now that the FOMC has highlighted it will remain as dovish as ever.
On the vaccine note, all I can say is dial down the entitlement volume and have a little patience. The vaccines only started appearing in December, and here we are at the start of February. Form an orderly queue and spare a thought for those developing markets around the world that are so far down the back of it, they’re out of sight over the horizon. That is far more important than the ever so missed trip to Bali. It will come, I promise.
Not everything is playing the game in the buy everything universe though. The US dollar continued to grind higher, notably against the euro and the yen. Silver plummeted 10% as the Reddit vigilantes collided with a liquid market bigger than their margin accounts. That dragged gold lower which has been in range-trading limbo of late. Gold’s proclivity to fall faster with silver, then rise with it is an ominous sign for longs. Iron ore and copper are both well off their recent highs, and the technical picture looks wobbly. Unsurprisingly then, so is the commodity-centric Australian dollar, which also received a burst of QE dovishness from the Reserve Bank of Australia this week.
Higher energy prices and the virus-related lockdowns across Europe, America and parts of China finally appear to be making their way into the data of late. Japan’s Jibun Service PMI fell to 46.70 this morning, but more notably, China’s Caixin Services PMI missed severely, falling to 52.0 versus 55.80 expected. Among the sub-indexes, new orders weakened as did employment, suggesting that the restrictions in China and critical export markets are making their way into the data at last. That was enough to take the wind out of China equities today, with the PBOC also net withdrawing liquidity via the repo market today. There are undoubtedly some pre-Lunar New Year distortions in the data. I believe it won’t dent overall sentiment unless this pattern continues past the February data and Chinese New Year.
European inflation will also feel the oil effect this afternoon, with Headline and Core Inflation MoM expected to increase by 0.50% in January. The risk is that Headline Inflation prints quite a bit higher, which will have the inflation hunters of Europe making noises. However, changes in the CPI weightings may account for some of the distortions, and oil inflation is transitory, not systematic. With Europe facing a double-dip recession, wage inflation will remain non-existent, and talk of tightening into a recession would be lunacy, despite the EU having form in this respect. None of it is likely to be helpful to the short-term outlook for the euro though.
Distractions aside, markets are now back to US stimulus-watch, which means buy the dips in equities unless something material challenges the bill’s progress through Congress.
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