Weekly Market Commentary By H.E.R.O. (25 to 29 Jan 2021)
Markets collapsed in the worst and most volatile week since October 2020 as hedge funds had to carry out forced selling of their long positions to offset heavy losses incurred from their heavily-shorted stock positions that were short-squeezed by the hordes of retail day traders on Robinhood ganging up in Reddit and other social media forums to move speculative stocks, such as fading videogames chain store GameStop that never paid a dividend and with declining sales and profits, like never before, a phenomenon which spread globally from U.S. to Europe and Asia.
- MSCI ACWI All World index -3.6%, S&P 500 -3.3%, Nasdaq -3.5%, FTSE -4.3%, DAX -3.2%, Stoxx -3.4%, Hang Seng -4%, CSI 300 -3.9%, Apple -5.1%, Facebook -5.9%.
Morgan Stanley said in a note to clients that the wild swings during the week had resulted in the top five heaviest days for de-grossing over the past decade as hedge funds unwind their equity positions and market exposure. JP Morgan commented that the de-grossing and de-leveraging by hedge funds in the U.S. markets is likely to persist for a while longer. Notably, a number of growth stocks in Europe appeared to have undergone their capitulation moment on Thursday and had a slight bounce up on Friday even as U.S. stocks slumped.
Cyclicals were hit by waning vaccine optimism after the much-anticipated J&J single-dose vaccine performed worse-than-expected with 66% efficacy in preventing COVID in a major clinical trial, and is less effective particularly against the South African variant, as well as the uncertain outlook for deploying COVID vaccines, and how even Israel, the most-vaccinated country in the world with more than 30% of its population vaccinated, is struggling with the emergence of more infectious variants that is overwhelming its hospitals, showing the long road ahead for the rest of the world as COVID infection cases exceeded 102 million.
In China, the overnight money-market repo rate surged to the highest in almost six years, reflecting tighter financial conditions as the People’s Bank of China warned about asset bubbles in the stock and property markets and drained a net 150 billion yuan ($23 billion) of funds on Thursday using open-market operations — a process through which the central bank and the banking system lend to one another — the largest such amount since October. That adds to its 178 billion yuan withdrawal during the week, and comes after the central bank unexpectedly mopped up medium-term liquidity earlier this month. Fears of deleveraging drove China and Hong Kong equities lower during the week, and traders are bracing for a prolonged period of higher funding costs and its lashing impact.