What you need to know on the markets this week: 'Eat the rich' - Robinhood's reckoning after GameStop, the Bank of England's toolbox, and blockbuster earnings
- An army of Reddit traders unleashed a spectacular short-squeeze on GameStop stock and others.
- Hedge funds will likely swallow multibillion-dollar losses and the regulators are watching.
- The Bank of England may give a glimpse of what's in its toolbox, including negative rates.
This week saw a bunch of retail investors join forces through a Reddit forum and take on some of the biggest names on Wall Street by aggressively buying up the shares of unpopular small-cap companies and forcing the hedge funds that had bet against them to unwind those bets, no matter what the cost.
The press has been alight with the narrative of the "little guy taking on the big guy" - day traders and amateur investors are punishing the established billionaire big dogs on Wall Street and potentially upending the financial market place as we know it.
It started with the shares of brick-and-mortar retailer GameStop - the video-gaming store saw its shares rise as much as 1,000% to record highs. Word quickly spread among the members of the r/wallstreetbets subreddit to squeeze other stocks that the hedge funds had previously sold, betting on a further price decline.
Rapidly, shares in AMC, BlackBerry, Nokia, and even Tootsie Roll, scored double- and triple-digit gains, triggering more and more losses for the big Wall Streeters. The frenzy spread beyond equities, with silver and meme-inspired cryptocurrency Dogecoin bursting higher.
It wasn't long before trading apps like Robinhood and several major brokerages were overwhelmed by a swarm of users buying shares and derivatives in these companies.
Volatility shot up even faster than at the outbreak of the coronavirus crisis last year. Restrictions on further purchases tempered some of the huge price swings and even the broader stock market was rattled - the S&P 500 posted its biggest weekly slide since October, falling 3.3% last week.
Robinhood and the sheriff
Robinhood, which, according to media reports, even had to tap its bankers at one point for extra credit lines to manage the rush, has infuriated its users with the steps it took to curb their ability to trade these red-hot stocks. In more than 120,000 tweets in just two days, users called for a boycott.
The frenzy in the likes of GameStop and Dogecoin will inevitably die down and the day-trading army will pocket handsome gains, nurse unimaginable losses, or just move on. But the politicians and regulators might not do that quite so easily.
The Securities & Exchange Commission said on Friday it is keeping an eye on the recent market volatility and Democrats in Congress will hold at least two hearings to discuss Wall Street and online trading, although there is no date yet.
Negative in Britain?
The Bank of England meets this week to discuss monetary policy. The central bank isn't expected to make any changes either to interest rates, or to its asset-purchasing program. The UK economy is in the middle of its third national lockdown to stem the spread of coronavirus. With more than 100,000 dead and millions infected, Britain has the worst track record in Europe.
However, a rapid rollout of COVID-19 vaccines is underway and the government anticipates 15 million of the most vulnerable people will have received at least one of the two-shot treatment by the end of February.
The BoE is taking notice and this may feed into its projections for both GDP growth and inflation later this year.
The BoE has said it expects the economy to contract for a second time in the early stages of this year. And with that in mind, economists will focus on what the central bank might say about deploying negative interest rates as a means to ward off more damage to overall activity.
"At the very least the BoE should publish its operational review of how ready the financial sector is to cope with negative rates," economists at Nomura said in a note.
The BoE has kept rates at 0.1% since March last year, when the pandemic first hit. In 2020, it bought a total of almost $1 trillion to keep borrowing costs low and keep cash flowing smoothly through the financial system.
A jumbo earnings week ahead
This past week saw results from some of the world's most prominent technology companies, including Apple, Facebook, and Tesla. This coming week sees a heady mix of "stay at home" companies, "real economy" firms, such as oil producers and pharmaceutical groups report results.
All this should give investors a fairly broad read on how the CEOs that run these companies are looking at 2021 and what prospects they see for recovery in global growth, corporate spending, employment, consumer demand, and a return to more normal activity.
Earnings in the w/c February 1
- ABB
- AbbVie
- Amazon
- Alphabet
- BNP Paribas
- BP
- ConocoPhillips
- Deutsche Bank
- eBay
- Exxon
- Ford
- GlaxoSmithKline
- Nintendo
- Orsted
- PayPal
- Peloton
- Pfizer
- Philip Morris
- Sanofi
- Santander
- Shell
- Siemens
- Spotify
- Unilever
Chart of the week - going to the doges
Dogecoin, a cryptocurrency that started as a joke based on a popular internet meme, saw a spectacular rally triggered by a flood of day-traders on a crypto-themed Reddit forum. As the price vaulted as much as 800% higher, Dogecoin suddenly found itself in the top 10 biggest crypto tokens by market capitalization.
