Global stocks trade near record highs, but surging cases of COVID-19 in India and Japan hit oil

Traders and financial professionals work on the floor of the New York Stock Exchange
Traders and financial professionals work on the floor of the New York Stock Exchange

Global stocks held near record highs on Monday, while oil prices fell in response to rising Covid-19 cases in key consuming countries and related concerns about economic recovery in Asia.

US futures held flat. Nasdaq futures were last down 0.09%, S&P 500 futures were up 0.01% and Dow Jones futures were up 0.12%.

US investors are expecting a flurry of earnings and economic policy announcements this week. Federal Reserve Chairman Jerome Powell is due to give a press conference on Wednesday when the central bank concludes a two-day monetary policy meeting. Economists are not expecting significant changes, but investors will nonetheless scour every word for insight into the likely path of interest rates.

“The April FOMC meeting should primarily serve as a barometer check of the economic recovery relative to the substantial forecast upgrades the Committee unveiled at their last meeting in March.” Stephen Innes, chief global market strategist at Axi said. “He’s likely to continue his subtle shift in tone about the outlook in a more promising direction,” Innes added.

President Joe Biden will be delivering his first speech in a joint congressional session on Wednesday, where he will likely shed further light on his infrastructure spending plans. Investors will also get the first glimpse of how the US economy fared in the first three months of the year later this week.

US 10-year Treasury note yield rose to 1.577%, up 1.3 basis points.

Asian markets came under pressure from the surge in COVID-19 cases in India and elsewhere across the continent. China’s Shanghai Composite closed 0.95% down, Hong Kong’s Hang Seng Index was down 0.4% at the end of the trading day.

The Japanese Nikkei 225 continued to recover after last week’s mixed performance linked to lockdown extensions in the country and closed 0.36% up. The Bank of Japan is set to release rate decisions and its quarterly outlook on Tuesday, although no significant policy changes are expected.

Concern about the economic impact of another wave of Covid-19 also impacted oil prices. WTI crude oil prices were last down 1.14% and Brent crude oil was down 1.16% on Monday. Cases in India, the third largest oil consumer in the world, rose at record rates this weekend, leaving families of patients scrambling for hospital beds and oxygen.

“There have been reports that’s various models are predicting this could hit over 500,000 per day this week which will gain huge headlines. While Indian case loads are so high, there will be concerns about the unevenness of the global recovery and the ability of variants to escape,” Deutsche Bank research strategists said.

Ursula von der Leyen, the President of the European Commission said fully vaccinated Americans could travel to the European Union this summer, potentially providing some impetus for the long-haul travel and energy sectors, but this was not enough to prop up crude oil.

European stocks started flat on Monday, the pan-European Euro Stoxx 50 was last up 0.04%, the UK’s FTSE 100 was down 0.07% and the German DAX was up 0.14%.

Bitcoin recovered over the weekend and rose above $50,000 again, after a highly volatile week which saw the cryptocurrency reach record highs paired and lose significant ground. It was last valued at $52,772.93 on Monday.

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Nearly half of Americans are too nervous to invest in stocks right now, new survey shows

investing app phone
  • An Allianz survey found that 48% of Americans do not want to take action in the equity market right now.
  • The survey showed nearly 75% of Americans foresee stock-market volatility picking up again in 2021.
  • Analysts say more volatility is likely in store as more strong economic data challenges the Fed’s signaling on interest rates.
  • See more stories on Insider’s business page.

Many Americans want to stay on the sidelines of the stock market this year as worries mount that volatility will accelerate and hurt their investments, according to a new survey from Allianz.

48% of the 1,005 respondents told the firm they want to stay neutral and not invest in the market right now, a rise from 43% over the final quarter of last year. That statistic runs parallel with findings that 74% of the group believes equity markets will continue to be very volatile this year.

The cautious tone comes as the US economy shows further signs of recovery from the coronavirus pandemic, with data this week showing a nearly 10% jump in March retail sales and new unemployment filings at a pandemic-era low.

“Investors seem to be in limbo right now, wavering between nervousness about the potential for volatility and hope for a better year, resulting in a lot of inaction that can be costly in the future,” said Kelly LaVigne, vice president of consumer insights at Allianz Life.

As the S&P 500 recently has climbed to all-time highs, Wall Street’s so-called fear gauge – the Cboe Volatility Index (VIX) – has slid back to its lowest level since before the start of the COVID-19 crisis. But volatility accelerated in the tech sector earlier this year as rising interest rates spurred concerns about the effect of higher borrowing costs on businesses. That prompted a sharp pullback in numerous high-flying tech stocks and knocked more speculative areas of the market like SPACs and green energy.

Another possible source of volatility involves the Federal Reserve, which has historically moved markets with rate-hike guidance. Inflation – which the central bank monitors closely when making decisions – is rising as the economy recovers, and although the Fed has said it will keep rates near zero until at least 2024, any deviation from that could jolt markets.

Talks over tax policy and infrastructure spending in Washington may also be a source of volatility for stocks moving forward this year.

Read more: Buy these 16 stocks with more than 10% upside that are set to increase dividend payments for years to come, UBS says

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US futures and the dollar rise ahead of what traders expect to be a bumper employment report

Stock market
  • US stock futures and the dollar edged up ahead of key March payrolls report.
  • Trading was thinned out due to public holidays in most major markets.
  • Economists expect non-farm payrolls to have risen by the most in six months in March.
  • See more stories on Insider’s business page.

US stock futures and the dollar rose on Friday, ahead of a key report on unemployment that will shed further light on the resilience of the economic recovery, although trading volumes were light on account of the swathe of public holidays around the world.

Futures on the S&P 500, the Dow Jones and the Nasdaq 100 rose between 0.1 and 0.4%, suggesting the benchmark indices could see more record highs when they reopen on Monday.

On Thursday, the S&P 500 scorched past 4,000 points for the first time after data showed a sharp rebound in manufacturing activity in March and following President Joe Biden’s unveiling of an infrastructure spending plan worth $2 trillion.

The Bureau of Labor Statistics will publish its nonfarm payrolls report for March on Friday at 8:30 a.m. ET, providing the most detailed look at how hiring fared throughout last month. The backdrop is promising. March had warmer weather, and a faster rate of vaccinations led some states to partially reopen for the first time since the winter’s dire surge in cases. Coronavirus case counts started to swing higher at the end of the month but largely stayed at lower levels.

Democrats’ $1.9 trillion stimulus plan was also approved early last month and unleashed a wave of consumer demand and aid for small businesses. Sentiment gauges surged to one-year highs, and Americans strapped in for a return to pre-pandemic norms.

Consensus estimates suggest March had the strongest payroll gains in six months. Economists surveyed by Bloomberg said they expected nonfarm payrolls to climb by 660,000, which would be nearly double the 379,000 gain seen in February. The unemployment rate is forecast to dip to 6% from 6.2%.

“We believe a vaccine- and reopening-related rebound in labor force participation is likely to start this month, and this could limit the magnitude of the decline in the jobless rate,” Goldman Sachs led by Jay Hatzuis said in a note.

US 10-year Treasury yields held steady around 1.67%, having hit 1.776% last week, their highest in almost 15 months. Bond yields have risen steadily this year, as prices have fallen, in line with a growing conviction among investors that economic recovery is picking up, which will reignite inflation.

The combination of accelerating growth and inflation makes it less attractive to own government bonds.

The dollar meanwhile traded fairly steadily against a basket of major currencies. The dollar index was last down 0.1% on the day, but still holding close to its highest in five months.

“Friday’s highly-anticipated non-farm payrolls report comes out at a bit of an awkward time; for the first time in six years, the April jobs report falls on the Good Friday holiday, meaning that many major markets will be closed,” CityIndex strategist Matt Weller said in a note on Thursday.

“As a result, readers who are at their desks trading the FX or bond markets may see less liquidity than usual and the post-release move may peter out sooner than usual as traders who are watching the markets look to duck out early to enjoy a long holiday weekend,” Weller said.

Bitcoin nudged at $60,000 for the first time in two weeks, as risk appetite pushed investors into more volatile assets. It was last up 1.2% around $59,540, having gained over 8% in the last week.

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8 reasons why fears of a stock-market bubble are overblown, according to Goldman Sachs

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Goldman Sachs said that fears of a bubble were overblown.

  • Goldman Sachs said that fears of a bubble in markets were overblown, despite a few concerning signs.
  • The analysts gave eight reasons, including lower levels of leverage and risk-taking.
  • They also said the boom in tech stocks had a firmer basis than in the dot-com bubble of the 1990s.
  • Sign up here for our daily newsletter, 10 Things Before the Opening Bell.

With retail traders driving up stocks like GameStop, blank-check companies booming, and bitcoin soaring, many investors are worried about bubbles in financial markets.

But Goldman Sachs analysts said in a note on Monday that fears about bubbles were overblown. There are a few worrying signs, but markets now appear much safer than they were during the dot-com crash or the 2008 financial crisis, they said.

Here are the eight key reasons investors should not be overly concerned about the recent market frothiness, according to Goldman analysts including Peter Oppenheimer and Sharon Bell.

1. The stock-market rally is driven more by fundamental factors.

In bubbles such as the dot-com boom of the late 1990s, investors drove up asset prices with little rational basis, and the fear of missing out triggered buying frenzies.

The rise in stock prices over the past few years, particularly in tech, “has been impressive” but “is not nearly as extreme as the explosive rise that accrued during the late 1990s,” Goldman said.

The rally in tech firms can mostly be justified by “superior growth and fundamentals,” the note said, with earnings far outstripping the rest of the market.

2. The “equity risk premium” measure does not look worrying.

Goldman said that much of the market frothiness could be explained by record-low interest rates around the world.

The bank’s analysts pointed to a key measure of stock value, the equity risk premium, or the extra return investors get on stocks compared with holding risk-free bonds.

Goldman said that in the bubble of the late 1990s, investors were so confident about growth that they were prepared to buy stocks offering a dividend yield of 1% when they could make 6.5% holding bonds.

But record-low interest rates and better prospects today mean the equity risk premium is higher, suggesting investors are much more justified in bidding up stocks.

Read more: Cowen says buy these 10 retail stocks before a colossal wave of consumer spending sends them skyrocketing – including one expected to surge 71%

3. Market concentration has increased – but is not dangerous.

Goldman said Facebook, Apple, Amazon, Microsoft, and Google were increasingly dominant, with a market capitalization nearly three times the annual GDP of India.

But the bank’s analysts said that such a concentration “has reflected strong fundamental growth, rather than the hope, or promise, of returns far into the future.” This suggests it’s far more sustainable than in previous asset rallies.

4. A big jump in retail trading has followed years of outflows from equities.

The GameStop saga in January brought the power of retail investors to the attention of Wall Street.

Goldman said that the rise in amateur investing had been “breathtaking” and that one of its key measures of risk-taking had hit a level associated with a 10% drop in stock markets.

But the analysts said that “while flows have been significant of late, we have come from many years of outflows from risk assets like equities.”

5. Credit is cheap, but investors aren’t being overly risky.

Central-bank interest rates are at record lows, as were bond yields until recently, making borrowing very cheap.

But Goldman said that speculative bubbles are associated with banks and companies funding risky activities through debt and with a collapse in household savings, which “is not the case today.”

Banks are very strong thanks to reforms, the note said, adding that US households had accumulated about $1.5 trillion in savings during the COVID-19 pandemic.

6. Mergers and acquisitions are booming from a low base.

The excitement about special-purpose acquisition companies, or SPACs, has many investors worried about frothy markets.

“Booming M&A activity and equity issuance are reminiscent of activity rates in previous cycles,” Goldman said.

But it added that the activity did not appear excessive “when adjusted for the market capitalization of equity markets.”

7. The surge in certain sectors is driven by profitable companies.

Market bubbles are often driven by an enthusiasm for new technologies, such as the internet in the dot-com era.

Goldman said that while tech and green stocks had indeed boomed, a fall in these stocks should not lead to widespread company collapses, as most of them are profitable.

8. Stocks are rising as economies recover from a slump.

The Wall Street bank said the powerful rally in stocks from last March to September was typical of a “hope” phase of a bull-market run after an economic slump.

“This phase is generally followed by what we call the ‘growth’ phase,” when earnings pick up, it said, though there could be bumps along the way.

Read more: Hedge funds are ramping up bets against Chamath Palihapitiya’s SPACs and have already taken home $40 million this year. Here’s a detailed look at the wagers they’re making.

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Goldman Sachs says fears of a stock-market bubble are overblown for these 8 reasons

GettyImages 1158933047
Goldman said fears of a bubble are overblown

  • Goldman Sachs said fears of a bubble in markets are overblown, despite a few concerning signs.
  • The Wall Street giant’s analysts gave 8 reasons why, including lower levels of leverage and risk-taking.
  • They also said the boom in tech stocks has a firmer basis than the dotcom bubble of the 1990s.
  • Sign up here for our daily newsletter, 10 Things Before the Opening Bell.

With retail traders driving up stocks like GameStop, blank-check companies booming, and bitcoin soaring, many investors are worried about bubbles in financial markets.

But Goldman Sachs analysts said in a note on Monday fears about bubbles are overblown. There are a few worrying signs, but markets now appear much safer than during the dotcom crash, or 2008 financial crisis, they said.

Here are the 8 key reasons investors should not be overly concerned about the recent market frothiness, according to Goldman analysts including Peter Oppenheimer and Sharon Bell.

1. The stock-market rally is driven more by fundamental factors than investor craziness

Past bubbles such as the dotcom boom of the late 1990s saw investors drive up asset prices with little rational basis, with buying frenzies triggered by the fear of missing out.

Goldman said the rise in stock prices over the last few years, particularly in tech, “has been impressive… but it is not nearly as extreme as the explosive rise that accrued during the late 1990s.”

The rally in tech firms can mostly be justified by “superior growth and fundamentals,” the note said, with earnings far outstripping the rest of the market.

2. The key ‘equity risk premium’ measure does not look worrying

Goldman said much of the market frothiness is explained by record-low interest rates around the world.

The bank’s analysts pointed to a key measure of stock value, the equity-risk premium. This is the extra return investors get on stocks compared to holding risk-free bonds.

Goldman said in the bubble of the late 1990s, investors were so confident about growth they were prepared to buy stocks offering a dividend yield of 1% when they could make 6.5% holding bonds.

But record-low interest rates and better prospects today mean the equity-risk premium is higher, suggesting investors are much more justified in bidding up stocks.

3. Market concentration has increased – but is not dangerous

Goldman said Facebook, Apple, Amazon, Microsoft and Google are increasingly dominant, with a market capitalization nearly 3 times the annual GDP of India.

But the bank’s analysts said such a concentration “has reflected strong fundamental growth, rather than the hope, or promise, of returns far into the future.” This suggests it is far more sustainable than in previous asset rallies.

4. A big jump in retail trading has followed years of outflows from equities

The GameStop saga in January brought the power of retail investors to the attention of Wall Street.

Goldman said the rise in amateur investing has indeed “been breathtaking.” And it said one of its key measures of risk-taking has hit a level associated with a 10% drop in stock markets.

Yet the analysts said: “While flows have been significant of late, we have come from many years of outflows from risk assets like equities.”

5. Credit is cheap, but investors aren’t being overly risky

Central bank interest rates are at record lows, as were bond yields until recently, making borrowing very cheap.

But Goldman said speculative bubbles are associated with banks and companies funding risky activities through debt, and a collapse in household savings, which “is not the case today.”

Banks are very strong thanks to post-crisis reforms, the note said. US households have accumulated around $1.5 trillion in savings during COVID-19, the bank said.

6. Mergers and acquisitions are booming from a low base

The mania for special-purpose acquisition companies, or SPACs, has many investors worried about frothy markets.

Goldman said: “Booming M&A activity and equity issuance are reminiscent of activity rates in previous cycles.”

But it added activity does not appear excessive “when adjusted for the market capitalization of equity markets.”

7. The surge in certain sectors is driven by profitable companies

Market bubbles are often driven by a craze for new technologies, such as the internet in the dotcom era.

Goldman said tech and green stocks have indeed boomed. But the analysts said a fall in these stocks should not lead to widespread company collapses, as most of them are profitable.

8. Stocks are rising as economies recover from a slump

The Wall Street bank said the powerful rally in stocks from March to September last year was typical of a “hope” phase of a bull-market run after an economic slump.

“This phase is generally followed by what we call the ‘growth’ phase,” they said, when earnings pick up, although there could be bumps along the way.

Read the original article on Business Insider

Volkswagen rallies as much as 8.8% as investors buy into its plans to rival Tesla for electric vehicle dominance

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A Volkswagen worker works on the ID 3, one of Volkswagen’s electric cars.

German car manufacturer Volkswagen rose by as much as 8.8% on Wednesday, extending the gains made the day before when it unveiled its plans for expansion in the electric vehicle market that could make it the world’s leading producer.

Shares were up as much as 8.8% at one point, at 291 euros ($346), their highest since November 2008 and set for a 25% gain so far this week. Volkswagen’s US-listed shares closed 10% higher on Tuesday.

At its “Power Day” on Monday, Volkswagen said it would build six electric vehicle battery factories across Europe and produce predominantly electric cars by 2030. This has triggered a surge in the value of its shares.

Volkswagen also stated it could significantly reduce battery production costs, which in turn would drive down electric vehicle retail prices, and invest into building an electric vehicle software infrastructure to be used across all of its brands.

Disruption in supply chains through factory closures, manufacturing interruptions and delivery delays have put pressure on the car manufacturing industry throughout the pandemic.

By shifting its focus towards electric vehicles over the past year and effectively emulating Tesla’s strategy, Europe’s largest carmaker has gained back a significant amount of ground. Volkswagen shares have risen by 180% since the market crash in March last year.

The company is aiming to dethrone Tesla as the global leading manufacturer of electric vehicles: “Our goal is to secure a pole position,” said Herbert Diess, CEO of Volkswagen, on “Power Day”.

Read the original article on Business Insider

What you need to know on the markets this week: the future of Ethereum, what’s next for oil, and inflation is on the rise

ethereum
Ethereum’s price soared by more than 25% this week.

  • CME Group will launch Ethereum futures this week and the price is at a record high.
  • The three major forecasters will publish their assessment of the outlook for oil demand in 2021.
  • Inflation is picking up — should investors be worried? Analysts say “no.”
  • Visit the Business section of Insider for more stories.

The army of Reddit day traders appears to be moving on, having pumped up everything from cryptocurrencies, to tiny biotech stocks in the last week, now that their firing up of GameStop, AMC, Nokia and co seems to have mostly run its course. 

This coming week, we’ll be looking at the future of Ethereum, the pickup in consumer inflation and what the major forecasters are saying about the outlook for oil, now the price is trading around one-year highs. 

The dawning of the age of Ethereum

Another week, another cryptocurrency at a record high. Earlier in the year, it was bitcoin, then XRP, then “meme token” DogeCoin, which got swept up in the Reddit-driven trading frenzy and given an extra shout-out on Twitter by Tesla CEO Elon Musk. 

This time, it’s Ethereum grabbing the headlines. The second-largest cryptocurrency by market value after bitcoin has seen the price soar by more than 25% this week to record highs above $1,600. It’s not just down to the Wall Street Bets guys, either. Exchange operator CME group will launch its first Ethereum futures contract on February 8, another offering in the crypto market alongside its bitcoin futures and options. 

At the same time, crypto fund manager Grayscale reopened its Grayscale Ethereum Trust, after having closed the fund to new investors in late December for “administrative purposes.” In this week alone, the trust has seen inflows of nearly 100,000 ETH. Grayscale now manages nearly $5 billion in Ethereum.

JPMorgan estimates that initial volumes in Ethereum futures are likely to be low, much like bitcoin in the early days, but this will change quickly. 

“The listing of CME bitcoin futures coincided with all-time highs in bitcoin prices, and researchers at the San Francisco Fed suggested that, by providing a market where bearish positions could be more readily expressed, the listing of these futures contributed to the reversal of bitcoin price dynamics,” JPMorgan analysts led by Nikolaos Panigirtzoglou said in an note last week.

“In a similar vein, it may be that this week’s listing of ethereum futures contracts will be followed by negative price dynamics by enabling some holders of physical ethereum to hedge their exposures,” they said. 

Read more:Investors are flocking to trade Dogecoin and other hot digital tokens on Voyager, a platform with no Robinhood-style restrictions. Its CEO says Bitcoin will hit $100,000 this year – and shares 3 other cryptocurrencies to watch.

Oil – full speed ahead

The oil price hit its highest in a year this past week, leaving Brent crude futures trading just shy of $60 a barrel. The catalyst for the rally wasn’t the Reddit crowd, but ongoing evidence of the rollout of COVID-19 vaccines in the UK and US in particular that many hope will pave the way out of lockdowns and into more normal activity. 

The futures market shows traders and fund managers are more optimistic about the prospects for oil demand than at any time in the last year. The most recent data on oil inventories shows stocks of unused crude are at their lowest since last April, when a frenzied scramble for storage led to the WTI crude futures price dropping to -$40 a barrel. 

This coming week, the three major forecasters will release their most recent assessments of demand and their estimates of demand growth. OPEC, the International Energy Agency and the US Energy Information Administration will release their regular monthly reports. 

The EIA, which issues longer-term demand forecasts, expects to see the global crude market tilt into a modest deficit over 2021 as a whole, with consumption forecast at 97.77 million barrels per day, against supply of 97.13 million barrels per day. The IEA expects demand to grow by 5.5 million bpd, following a record contraction of almost 9 million bpd last year, while OPEC is looking for a more optimistic 5.9 million bpd. 

OPEC and several partner countries continue to restrict daily oil production to keep a safety net under the price. Investment bank UBS says the group will remain “in full control of the oil market” this year and this, together with the advent of an effective vaccine, means the price of a barrel of crude will continue to rise. 

“Given that we target Brent at $63 a barrel in 2H21, we continue to advise investors with a high-risk tolerance to be long Brent or to sell its downside price risks,” UBS strategist Giovanni Staunovo said in a note last week.

Inflation and, more to the point, the market’s expectations for inflation, is creeping up. A combination of increases in the price of things like oil and food, as well as vast amounts of cash flowing through the financial system are slowly translating into a pickup in consumer inflation. But this isn’t necessarily a bad thing, analysts say. 

The oil price is at its highest in a year, while food prices – as measured by the United Nations’ Food and Agriculture Organization – rose by more than 4% in January to hit their highest since mid-2014. Central banks generally use inflation measures that strip out food and energy prices when setting monetary policy, but that hasn’t stopped investors from betting on more increases to come. 

Pumping up inflation

This coming week brings inflation readings from the US and China, as well as Brazil, India, and Mexico among others. In the US, consumer inflation is forecast to have risen by 1.5% in January, at the same rate as in December. The bond market shows investors believe consumer and producer price pressures are going to continue rising. 

Analysts at DataTrek said in a note last week US five-year Treasury Inflation-Protected Securities (TIPS) have done “a reasonable job” of forecasting the stable rate of inflation seen in both producer and consumer prices over the last decade. 

“The most recent move higher for 5-year inflation expectations (2.18%, the highest since 2013) is therefore significant,” DataTrek analyst Nicholas Colas said.

“Importantly, TIPS are NOT saying rampant inflation is just around the bend. The 2.2% forecast embedded in those bond prices is simply a validation of the idea that the US will see a reasonable and lasting economic recovery in the years ahead,” he added.

The so-called breakeven inflation rate – derived by subtracting the yield of the five-year TIP from that of the nominal five-year Treasury note – has risen to 2.25% this week, its highest in almost eight years, having doubled in the space of eight months. 

“While the chatter around the inflation outlook is elevated now, we would expect it to become even more intense as we approach mid-year if our CPI forecasts are right,” strategists Ralph Axel and Olivia Lima at Bank of America wrote last week. They forecast a consumer price inflation (CPI) rate of 3.4% by May, which might prompt investors to revise their view on when the Federal Reserve may begin to tighten monetary policy – but they add a caveat. 

“History shows that markets tend to overreact to positive developments and price in hikes long before the Fed actually delivers,” they said.

Read more: Morgan Stanley says inflation is heating up and these are the 12 undervalued stocks in a ‘sweet spot’ that you need to own thanks to their pricing power

Chart of the week – GameStop

The army of Reddit retail traders is still active, but it would appear most have booked profits on their positions in the likes of GameStop and AMC – GameStop is now worth just over half of what it was at the height of the Wall Street Bets frenzy one week ago.

Daily chart of GameStop shares
Daily chart of GameStop shares

Earnings for the week ahead

2/08 Softbank 

2/09 Cisco

2/09 TOTAL

2/09 Twitter

2/10 A.P. Moeller – Maersk

2/10 Coca-Cola

2/10 Commonwealth Bank Australia 

2/10 Uber

2/10 Vestas Wind Systems

2/11 AstraZeneca

2/11 Walt Disney

2/11 L’Oréal 

2/11 PepsiCo

Read the original article on Business Insider

Goldman Sachs: Biggest ‘short squeeze’ in 25 years caused hedge funds to ‘de-gross’ at fastest rate since 2009

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Goldman Sachs said the GameStop saga had hit the wider market, with hedge funds rapidly cutting their positions

The US stock market is witnessing the biggest “short squeeze” in 25 years, forcing hedge funds to withdraw from their positions on stocks at the fastest rate since 2009, according to Goldman Sachs.

Last month saw GameStop shares rise more than 1,700%, “squeezing” hedge funds and others who had “shorted” the stock, costing them billions of dollars. A short position is a bet that a share price will fall.

The surge in GameStop and other heavily shorted stocks was driven by users of the Reddit forum Wall Street Bets, who forced up the price in an effort to make themselves money but also to hammer hedge funds such as Melvin Capital.

Read More: A chief investment strategist breaks down how the GameStop saga could upend long-standing practices on Wall Street – and shares her 4-part advice for navigating the frenzied trading environment

Goldman Sachs analysts this weekend shed some light on the situation in a note. “The past 25 years have witnessed a number of sharp short squeezes in the US equity market, but none as extreme as has occurred recently,” they said.

The equity analysts said a basket of the most-shorted US stocks has rallied 98% in the last three months. Estimates by data provider Ortex on Friday showed that short-sellers were sitting on losses of around $19 billion just on GameStop in 2021 so far.

Hedge funds and short-sellers who had made losing bets were forced to withdraw from the market rapidly at the fastest pace since 2009, in what is known as “de-grossing”.

They had to buy shares in companies such as GameStop and movie theater chain AMC to close their short positions, and sell other stocks to cover their losses.

“This week represented the largest active hedge fund de-grossing since February 2009,” Goldman analysts including David Kostin and Ben Snider said. “Funds in their coverage sold long positions and covered shorts in every sector.”

Kostin and his colleagues said regulations, limits put in place by trading platforms, or sharp losses could bring the amateur trading frenzy to a halt.

“Otherwise, an abundance of US household cash should continue to fuel the trading boom,” they said.

Read More: As Redditors flood the stock market, UBS breaks down 6 options strategies investors can use right now to protect their portfolios 

Goldman said retail investing was thriving because of the large amount of savings built up during the coronavirus period, as well as government stimulus.

“During 2020 credit card debt declined by more than 10%, checking deposits grew by $4 trillion, and savings grew by $5 trillion,” the investment bank’s analysts said.

“On top of these savings, our economists expect more than $1 trillion in additional fiscal support in coming months, including another round of direct checks.”

Read the original article on Business Insider

Five things you need to know about on the markets this week – Biden, big banks and central banks, bond yields, and Bitcoin

Workers hang the flags on the West Front facade in preparation for President-elect Joe Bidens inauguration
Workers hang the flags on the West Front facade in preparation for President-elect Joe Bidens inauguration

  • The stock market has shrugged off turmoil in DC and investors are focused on Joe Biden’s plans for the economy.
  • Bond yields are around their highest in a year, as traders prepare for a lot less stimulus from the Federal Reserve.
  • Earnings season gets underway, with Goldman Sachs, Netflix and IBM, among others.
  • Visit Business Insider’s homepage for more stories.

Stock markets finished the second week of January having reached all-time highs, overlooking fairly gruesome US labor market data, the ongoing explosion in cases of COVID-19 and unprecedented political turmoil in the final days of Donald Trump’s presidency, as he faces impeachment – again. 

Reflation has been the name of the game across the markets and anything even remotely economically sensitive has surged, including small-cap stocks, oil and gas and, of course, cryptocurrencies, particularly following Joe Biden’s plans for a $1.9 trillion stimulus package. 

Next week brings a heady mix of the political, the macroeconomic, the corporate, and the crypto. Here’s five things we’ll be watching

1. Inauguration of President-Elect Joe Biden

January 20 bids farewell to one of the most controversial US presidents in living memory. After four years in the White House, Trump will bow out, leaving Biden as the 46th president. Trump will also be the first US president to be impeached twice over his role in the storming of the Capitol by violent supporters of his on January 6 who attempted to stop the counting of the electoral college votes.

The siege has had little impact on the financial markets, as the S&P 500 hit record highs, buoyed by economic optimism and hopes that COVID-19 vaccines will eventually offer a permanent route out of lockdowns and mobility restrictions. Even though Trump says he won’t attend the inauguration, there will be more troops in Washington DC on the day than in Iraq and Afghanistan combined to quell any potential security threats. 

2. Pumping up the reflation trade

After having lain dormant for years, inflation could be making a comeback. Market-based expectations for inflation have picked up sharply in the latest week, as a steady rollout of COVID-19 vaccines has helped feed a sense of optimism that, while things are pretty grim right now, they are about to turn a corner. 

With a Democrat-controlled Congress, investors believe there will be less pressure on the Federal Reserve to step in and provide extra support to the economy, whether that is via a rate cut or an increase in its bond purchases that help keep credit cheap.

Bond yields have marched higher and yield curves – the difference between short-dated and long-dated bond yields – have steepened, dragging the dollar higher and reflecting this perception that inflation will start to take root as the economy recovers, which eventually, in theory, will merit a rate rise. 

But for now, investors need not fret too much about a damaging inflationary spiral. This initial increase in expectations is more a matter of making inflation “less low” and should remain the case over the next year, at least, according to RBC Global Asset Management’s chief economist Eric Lascelles said in a note this past week.

Most notably, the US 10-year breakeven inflation rate – a market-based gauge of inflation expectations based on the difference between nominal bond yields and their inflation-linked counterparts – has topped 2% for the first time since late 2018. The prevailing consumer inflation rate is well below there. At the last count it was 1.4%.

“Far from forcing central banks to hike rates prematurely, central banks are likely actually celebrating the development. This is in part for the aforementioned reason: it is dragging inflation and expectations closer to their target,” Lascelles said.

Read more: Morgan Stanley says over 20% could be wiped off Nasdaq 100 valuations if US Treasury yields normalize

3. Inflation to central banks: “You rang?”

Investors will get a chance to see how some of the world’s most influential central bankers are reacting to the pick up in inflation expectations, given that a number of them meet next week to discuss monetary policy. And, on top of that, we’ll get inflation readings from the UK, the eurozone, Germany, Canada, Japan, and New Zealand. 

UBS Global Wealth Management said this past week that the top question among their clients was: “Central banks around the world try to create inflation, but how can they reconcile: higher inflation means higher rates and higher rates will lead to higher debt burdens for most of the counties?”

The People’s Bank of China, the European Central Bank and the Bank of Canada all convene to discuss interest rates and the likely course of monetary policy in their respective economies. 

Managing the ongoing fallout from the COVID-19 pandemic, as economies across Europe, the Americas and parts of Asia impose hefty restrictions on movement and even full-on lockdowns, will be front and center. But, with the advent of mass vaccination, none are expected to do more than they are currently committing to. 

4. Banks, oil services, and Big Tech – old and new – report 4th-quarter results

After the stomach-clenching contraction in the economy in the second quarter of 2020, corporate earnings staged a turnaround. Chief executives expressed confidence about the outlook for earnings growth and the economy and their optimism was reflected in a batch of third-quarter results that contained the most upside surprises in a decade

This week, investors will get a look at how Wall Street weathered the final, turbulent three months of the year, when a contested presidential election, another surge in global cases of COVID-19 and the euphoria from the emergence of a vaccine made for a volatile quarter.

Bank of America, Goldman Sachs and Morgan Stanley report results and there will be a lot of scrutiny over what they say about anything from the provisions they’ve made to deal with struggling consumers, market volatility, and the outlook for 2021 and beyond. 

In the tech sector, pandemic “winner” Netflix reports fourth-quarter results. There will be intense focus on the streaming platform’s subscriber numbers to see if it was able to keep audiences glued to their TV screens and away from rival Disney+, even after the economy effectively reopened from mid-year onwards. 

A couple of “real economy” companies also report next week, which could give the “Great Rotation” trade of late 2020 another shot in the arm. Oil services companies Schlumberger and Baker Hughes – both of which got battered by the historic fall in crude prices in the spring when global transport ground to halt – will deliver fourth-quarter results, along with semiconductor maker Intel and “OG” Big Tech company IBM. 

Read more: BANK OF AMERICA: Buy these 8 US stocks poised to soar in the first quarter of 2021- and avoid these 2 at all costs

5. Don’t forget Bitcoin – no one else has

It’s impossible to talk about markets right now without talking about crypto. Bitcoin hit record highs near $42,000 on January 8 and since then, has been enveloped in huge volatility that has seen the price lose as much as 20% in 24 hours, only to regain it in the following 24 hours. 

Big-name investors have sung its praises, and some investments banks have even talked about it as a viable safe-haven alternative to gold. Last week, however, a growing number of voices began to talk about a possible bubble in cryptocurrencies. They drew comparisons with the dot-com crash of the late 1990s, in which technology company valuations were pumped sky-high by investors keen to jump on the “digital bandwagon,” only to have those prices collapse within weeks. 

Google searches for “Bitcoin” are around their highest since late 2017, when the coin first rocketed to a then-record around $19,890 from around $4,000 in about three months. In the last three months, the price of a Bitcoin has more than doubled to around $35,000 from closer to $14,000 and most market watchers agree that a correction isn’t beyond the realm of the possible. 

Chart of the week

This week’s Chart of the Week takes a look at the shift in market-based inflation expectations and the stock market, most notably, the S&P 500, over the last five years.

US 10-year breakeven inflation rates vs S&P 500
US 10-year breakeven inflation rates vs S&P 500

Our most-read stories in the last week:

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Alibaba falls 7% in premarket trading after Chinese regulators open antitrust investigation into the company

Alibaba
Alibaba said it was aware of the regulatory actions.

US-listed shares in Alibaba fell by 7% on Thursday, after Chinese regulators said they had launched an anti-trust investigation into the country’s biggest technology company. 

  • US-listed shares in Alibaba fell in premarket trading, after China regulators opened probe into the e-commerce company. 
  • It echoed the losses overnight in Asia, where the company’s Hong Kong-listed shares closed 8.1% lower. 
  • Visit Business Insider’s homepage for more stories.

Separately, other watchdogs said they would hold talks with Alibaba’s affiliate fintech company Ant Group. The Chinese government is increasing its oversight of large tech companies and, in particular, has cracked down on Jack Ma’s tech empire.

US-registered shares in Alibaba, an e-commerce platform founded by Ma, were down 7.1% at $238.02 in pre-market trading on Thursday. This echoes the losses overnight in Asia, where the company’s Hong Kong-listed shares closed 8.1% lower. This was the largest one-day drop in Alibaba’s Asia-registered shares since mid-November, when Ant’s IPO, which would have been the world’s largest, was pulled at the last minute after China introduced stricter regulations for financial services.

Ma is also the co-founder of Ant, and China’s richest person (as of November).

In separate statements released Thursday, both Alibaba and Ant Group said they had been notified about the regulatory actions and would cooperate, per The Wall Street Journal.

Read the original article on Business Insider