Expect the unexpected
Three different events took hold of markets last week, raising numerous questions about 2021’s prospects. We saw the stories of a retail investor-fuelled rally in Gamestop shares which captivated markets, the EU take hasty steps to block the export of EU-produced coronavirus vaccines, and Brexit supply issues escalate causing the shortages of retail goods to intensify.
The true effect of social media’s role in our day-to-day lives arguably became evident in 2016, when platforms were found to have swayed people into how to vote in regard to the US election and Brexit referendum. However, it was considered to only be an indirect influence on markets. Last week, that all seemed to change when a group of Reddit users–who had discovered that hedge funds had huge, short positions in Gamestop shares from SEC fillings–decided to drive prices higher and ‘short squeeze’ institutional investors. Over the weekend, it emerged that Melvin Capital had sustained a loss of 53% in January (or approximately $4.5 billion), which has largely been crystalised now that the fund had to remove its short position and rebalance its holdings.
This series of events has raised lots of questions about how, and perhaps more importantly whether, this activity should be curtailed in the future. Numerous market regulation experts have commented in the past week and it seems that there is nothing inherently illegal about the activity. There is no evidence that anyone was misled about the underlying value of the security; rather it seems to be a democratic move to raise the price. While the comparison to the 2016 Trump campaign and the EU Referendum is obvious, in those episodes there was a clear misrepresentation of facts that resulted in scrutiny of social media platform’s custodial role. In this case, an unflattering parallel has been drawn to the US Capital riots, focusing on social media’s role in upending conventional behaviour. In both cases, no remedy for the underlying cause comes to mind.
Next, we saw national shortages in coronavirus vaccine doses cause the EU to trigger a clause of the Brexit treaty which could block the export of EU-manufactured vaccines to some countries such as Northern Ireland, causing widespread criticism. The rushed nature of the laws passaged caused universal condemnation, which set in motion a reversal of events over the weekend. Phone calls were held with offended parties, Micheál Martin, Arlene Foster, and Boris Johnson, to smooth over any hard feelings, although there was the sense that the damage had been done. Valdis Dombrovskis, the EU Trade Commissioner has attempted to clarify the law's objective, as not to put the EU first, but rather a measure to ensure distributional fairness. For some, including UK Eurosceptic Tories and Northern Ireland’s right, this provocation calls for further action to redress weakness in the Brexit agreement. It’s unclear, after years of study and negotiation, that more amenable solution to Northern Irelands Brexit situation exists.
Finally, last week saw the already problematic situation of rising freight prices and supply shortages for many retail goods become more acute. Last year, when Covid became a global issue and wide-spread lockdowns began, a sharp increase in shipping costs made sense; fewer goods manufactured and fewer people to ship them means a higher cost or less supply. Fast forward a year, over which oil prices–a key component of shipping costs–have been struggling to reach pre-covid ranges of around $50 per barrel, and the Chinese Manufacturing PMI has marked 11 months of continuous capacity expansion; however, we've seen a magnificent skyrocketing of shipping costs between EU, UK and Asia. Markit PMI data out of the EU and UK measures supplier delivery times–using the same scale of 50 equals no-change, below 50 is deterioration, and vice versa–which has registered a near-unprecedented increase in delays. The Eurozone number has dropped from 50 in mid-2020 towards the mid-20s, while the UK has gone from mid-40s to low-20s over that same time frame. A Financial Times article quotes Frucom, representing European traders of fruit and nuts have witnessed a nearly four-fold increase per-container since November 2020. The implications for western economies are clear, a sustained cost will hit consumers and, in some cases–where goods being shipped have a time component, for example, a fashion line–lead to large scale business losses.
Bottom line: The solution to each of these three issues isn’t clear, and in the case of shipping, the cause isn’t widely understood. While it seems the Reddit-Gamestop saga and EU vaccine threats make for better headlines, the shipping and freight cost issues being caused by Brexit should have the public’s attention, as it’s this that's more likely to have a profound consequence on the average person.
The week ahead
Last week, the Pound added to four-month gains bringing it to three-year highs against the Dollar. Nearly nine million UK residents have now received their first dose of a coronavirus vaccine, marking continued progress on government goals. However, the EU’s demand that the UK divert supply of the vaccine, could pose problems for Sterling if the UK suffered disruption in its supply chain. On Thursday, the Bank of England will announce its latest monetary policy decision, alongside the quarterly Monetary Policy Committee report. Forecasts suggest unchanged policy measures, but the MPC report will be the latest look at the health of the UK economy.
- Final Manufacturing and Services PMI’s are forecast to read 52.9 and 38.8 respectively.
- Thursday is the main focus of the week, with Bank of England Governor Andrew Bailey due to speak. The bank rate is expected to remain at 0.10% with the asset purchase programme also staying unchanged at £895 billion.
Preliminary data out of Germany, France and Spain showed better-than-expected economic conditions as the trading bloc’s economy seems to have weathered the impact of new restrictions. However, ECB member, Isabel Schnabel, warned that this could be a short-term anomaly and should not be mistaken for a sustained increase in inflation. Last week, the European Central Bank stepped up its dovish rhetoric against the appreciation of the Euro last week, with ECB member, Klaas Knot, stating that there is still room to cut rates.
- Preliminary flash GDP q/q is forecast to come in at -1.4% down from 12.5% previously.
- The CPI flash y/y estimate is also due on Wednesday with a reading of 0.4% expected, up from -0.3%.
- Final Manufacturing and Services PMI’s for January are also scheduled for release.
The US Dollar traded positively throughout most of January, the DXY Index recorded a 0.71% monthly gain. This strength in the US Dollar seemed to coincide with the increasing demand for safe-haven currencies as market sentiment deteriorated and volatility accelerated. It’s possible that the short squeeze of stocks, such as GME and AMC, contributed to the downturn in market sentiment which caused the VIX to jump from 23 to 37. Against this backdrop, there are a number of economic releases to watch this week:
- The ISM Manufacturing PMI came in at 58.7 in January compared with a downwardly revised 60.5 previously, the eighth consecutive month of expansion for the US. While the Markit Services PMI printed at 59.2 in January down from 57.1 in December, and above the 59.1 forecast, still remaining in expansionary territory.
- Non-Farm Payrolls data is forecast to come in at 55k in January, an improvement from December’s -140k.
- The US unemployment rate is expected to hold steady at 6.7%.
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