02-02-2021
George Lucas, Raiz Group CEO
Equity markets felt the effects over the last 10 days of the surreal GameStop saga, which saw shares in the retailer, which operates a network of 5000 video game stores in the US, rise stratospherically as day traders laid siege to short-sellers betting against the loss-making chain.
The scenario, enabled by the internet and social media and executed on online trading platforms like Robinhood, took professional investor/hedge fund managers by surprise.
While the focus has been GameStop, other heavily-shorted favourites like AMC Entertainment, BlackBerry, Bed Bath & Beyond, Nokia and Naked Brand, were also swept up in the drama.
The chaos captivated Wall St as some major hedge funds suffered multibillion-dollar losses inflicted by day traders loosely organised around a forum on social media site Reddit called WallStreetBets.
The fallout from this SM-inspired short squeeze in US equities has been a deleveraging in global markets and a sell off as hedge funds close out both long and short positions in the market and reduce their risk as they analyse what happened, and how to avoid it happening to their positions.
Melvin Capital in spotlight over GameStop
Still on the GameStop drama, I need to mention Melvin Capital, a $12.5bn hedge fund which was forced to seek a $2.75bn cash infusion after losing 30 per cent in the first three weeks of January.
Melvin disclosed its bet against GameStop in regulatory filings attracting the ire of retail inventors who took to online forums like Reddit to drive up shares in companies it was betting against.
Soon afterwards, the narrative morphed from a successful short-squeeze on Melvin into a broader anti-establishment movement that has been compared to Occupy Wall Street.
Trading platforms drawn into saga
Online trading platforms, which promote themselves as democratising trading, also became a focus of the chaotic week when they moved to stop clients from purchasing GameStop shares.
This decision was due to a risk that the platforms, such as Robinhood, would not be able to meet their capital calls for collateral for trades their clients conduct to central clearing houses. This made it necessary for them to stop buy trades in stocks like GameStop through their platforms.
In the wake of the ban, Robinhood ended up with a rating close to one on the App store revealing that retail investors did not understand that equity markets are really futures markets two days out (settlement). This results in collateral needing to be posted to guarantee trades are settled.
US regulators eye wild week on Wall St
Following the debacle on Wall St, US regulators are now looking at the GameStop drama to understand if market manipulation occurred. Indeed, the the SEC, traditionally cautious with public comment, issued a rare joint statement from its acting chair and commissioners during the week.
It’s likely to be examining social media posts by non-licenced individuals to see if they are recommending stocks as the online movement is large enough to create an issue for regulators.
Q4 consumer prices lift in Australia
In Australia, consumer prices rose 0.9 per cent in the December quarter, with the jump largely reflecting price hikes for items whose prices are set by the federal government.
Even so, underlying inflation is holding up better than the Reserve Bank had anticipated. I think it will strengthen further over the course of the year and, in turn, may cause the RBA may end its quantitative easing programme earlier than most anticipate.
The very high cost of sea freight supports this conclusion, combined with the extended delays getting product shipped. This makes some imports and exports unviable and will create supply issues in Australia as well as for much of the developed world, which is dependent on exports from China. Increasing demand with no corresponding increase in supply will assist prices to rise.
Eurozone continues to feel impact of COVID-19
In Europe, there was a raft of Q4 GDP data from eurozone economies. It showed that Germany avoided contraction, while tough restrictions to curb the spread of COVID-19 in France and Austria caused both those countries’ GDP to fall in Q4. Meanwhile, Spain’s laxer approach meant its economy grew by 0.4 % in the quarter. These figures outperformed market expectations.
Meanwhile, in the US there was a more limited 4.0 per cent annualised gain in Q4 GDP, which was below expectations. The subdued number was mainly due to some temporary weakness in consumption, which was dragged down by the resurgence in coronavirus infections.
With the number of coronavirus cases now in decline and a new $900bn stimulus, I expect consumption growth to accelerate again in the first half of this year in USA.
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