"There’ll be some blood no doubt about it… But we’ll come through..."
- David Bowie, Black Tie White Noise
This week has seen a marked pick up in volatility and more pronounced risk aversion, as an unexpected and perhaps unusual amalgamation of factors combined to create some very ‘noisy’ markets.
Most notably perhaps, was the interaction between social media chatroom(s) and specific low liquidity stocks with high short interest - as has been widely publicised in the press over recent days. These incredible short squeezes, brought about by what appears to be widespread and concurrent retail option purchases - leaving the market short gamma as well as short stock - resulted in significant losses for the short holders and as a result put downward pressure on the indices, as de-risking / de-grossing of positions saw longs sold to fund losses on shorts.
Further, this week's FOMC meeting brought with it a more sober near-term economic narrative, as Chair Powell described the recent months’ economic and labour market progress as having “moderated”. Further, Powell described the downside risks from the virus as remaining “considerable”, as the economy remains a long way from a full recovery. However, Powell also dampened hopes of a more responsive monetary reaction function by suggesting that the FOMC will look through “transient” rises in inflation over coming months and will aim to maintain accommodation below ‘full employment’, in order to address equality in the workforce (in line with their new asymmetric maximum employment and symmetric inflation target under AIT). Ultimately, therefore, the Fed pledge to maintain accommodation is a modestly dovish iteration at the January FOMC. At the same time, the Biden administration continues to push for additional significant fiscal policy that should provide further underpinning of consumption and earnings growth through 2021.
On the virus front, there has also been something of a wobble in sentiment. Over recent sessions there has been a deterioration in the balance between the near-term virus trajectory (which has disappointed in many regions with extensions of lockdown restrictions across Europe and some tightening across Asia) and the expectations of uniform and significant vaccine production, expansion, and rollout. This has been highlighted not just in the disparity of vaccine rollouts between countries, but also in the recent spat between the EU and a coule of the major vaccine producers, about production expansion difficulties / delivery delays.
Finally, the release of the tech behemoth results last night was also taken as a trigger to sell equities, as after-hours indicators suggested. However, while there may have been some modest disappointments in some of the earnings metrics, there were also some very impressive statistics. I am not going to try and debate the implications of these results relative to the current valuation levels of these stocks, but against the current backdrop, I find it difficult to see how these figures detract from the case for these globally dominant tech innovators with demonstrable future earnings and huge cash holdings… at least not yet.
Overall, therefore, I feel that it boils down to a question of positioning, sentiment and conviction. There are some signs of recent moderation in growth and deterioration in virus dynamics. However, there are also signs of less scarring and lower credit deterioration (as Powell also noted). Further, as UK PM Johnson announced in the House of Commons on Wednesday, the UK expects to begin reopening, starting with schools, from early March. This is hopefully the first step to a sustainable (vaccination-driven) path to normality, a normality that due to the external nature of the shock could see a faster recovery than previous recessions (even an overshoot on pent-up demand in some sectors).
It would be remiss not to maintain a closer eye on market developments in the near term (including the technical adjustments to individual stock movements), but from our perspective, the macro backdrop remains positive - monetary accommodation, fiscal stimulus, well behaved credit metrics and hope of a (relatively) orderly global vaccine rollout.
To analogise the David Bowie song (today’s title), high levels of White Noise may persist for a while longer, but for now at least, we are reluctant to remove the Black Tie synonymous with the recent (US tech led) risk asset celebrations.
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