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01 March 2021

Volatility Strikes US Markets

Last week saw yet more volatility in global markets, particularly in the US. Both the S&P 500 and the Nasdaq declined sharply at the start of the week, but managed to recover slightly before resuming a downwards trajectory and heading into Friday 26th February, closing at -1.48% and -2.78%, respectively. The Federal Reserve’s (Fed’s) reaffirmation that levels of quantitative easing and interest rates are to remain unchanged for the foreseeable future may have fuelled the main concern weighing on the minds of investors, an event known as ‘inflation bounce’.

As US 10-year treasury yields rose to their highest one-year level (above 1.5%), the market appears to be over-confident that the re-opening of the US economy. This, combined with President Biden’s proposed stimulus package, will result in high levels of inflation, forcing an end to the Fed’s expansionary monetary policies. Despite the reflation trade becoming a key theme, a range of disinflationary factors are in play in the medium to long term. Some of these include fast-paced technological advancements, a damaged labour market and high numbers of insolvent businesses post-COVID, which could outweigh the inflation seen once the initial period of pent-up demand after lockdown ultimately cools down. In the near term, it is likely that equity prices will continue to be affected by inflation sentiment, as they have shown a negative correlation to bond yields in the past.

Nonetheless, the main driver in the decline of the S&P 500 and Nasdaq last week has not solely been a result of rising bond yields. Monday 22nd February saw the largest day of short additions since June 2020, with JP Morgan reporting that hedge funds have been building short positions as they expected a speedy correction in the share price of the companies that they were short-squeezed from in January. The ‘Wall Street Bets’ forum clearly picked up on this, as GameStop rallied 104% on Wednesday, causing an estimated US$664m loss for those short on the stock. On the same day, the hedge fund VIP basket - which tracks hedge funds’ positions in the 50 stocks that appear the most often in their top 10 holdings - decreased by almost 2.5%. Whether this was a result of hedge funds selling their large and liquid holdings to meet capital requirements from the short-squeeze or in reaction to potential market weakness is unknown. However, many large tech companies are top holdings for hedge funds and make up a significant portion of the Nasdaq, which suffered the worst performance across the board.

In the UK last week, the FTSE 100 was up +0.77% going into Friday. Boris Johnson’s plan to fully re-open the economy by June 21st looks to have provided some resilience to the downfall in US markets. The announcement catalysed a rotation into stocks whose performance has been underwhelming throughout the pandemic, yet are poised to take advantage of a return to normality. International Consolidated Airlines recorded the largest gain in the FTSE 100, up 15.66%. While other consumer-facing businesses, such as Cineworld (+23.35%), EasyJet (+16.60%) and SAGA (+26.12%) were among the top 20 performers in the FTSE All Share.

Taking a closer look to home, Yorkshire-based supermarket company Asda is already undergoing a substantial reconstruction under its new ownership. The Issa brothers, who recently purchased the company through a £6.6bn deal funded mainly through debt, are not wasting any time transforming the business. Roger Burnley, Chief Executive, Asda, has warned that 5,000 jobs could be put at risk, including 3,000 non-store jobs, as the aim is to focus on its online offering to customers after the shift to online grocery shopping was accelerated by the pandemic. The restructuring would create 4,500 additional jobs, cutting roles in areas where demand has drastically changed and allocating new positions to expand its online presence. It is unknown whether the impact will be felt in the firm’s head office in Leeds, with the hope that jobs will either be retained or employees retrained to meet these strategic objectives.

Please note that investments and income arising from them can fall as well as rise in value. This communication is for information only and does not constitute a recommendation to buy or sell the shares of the investments mentioned.
 
Volatility Strikes US Markets
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