Good morning,

The Federal Reserve, as expected, took a very dovish tone last night, as they committed to keeping interest rates near zero and the printing press turning over at the same pace.  They say that they’re a long way from exiting any of their policies and that the recovery is slowing down in some areas and the “crisis continues to weigh on economic activity, employment, and inflation, and poses considerable risks to the economic outlook.”  This was probably a little more downbeat than the market was hoping for and instead of weakening the Dollar, with all this talk of no inflation and ultra-loose monetary policy continuing, it actually gave it a bit of a lift, as investors took a flight to safety and stock markets in the US had their worst day since October – a reminder to investors that prices do move in both directions.

A few stocks proved the exception to the rule, the most notable of which is Gamestop.  The share price of this bricks and mortar video games retailer rose 135% yesterday and is up almost 700% in a week! The move is coming from retail investors who are trying to make life uncomfortable for hedge funds that are ‘shorting’ the stock.  By driving the price of the shares up, short sellers are having a very difficult time in financing their bets against the company and in one case a hedge fund has had to close its position and receive a rumoured $2bn bailout from other funds to stay afloat.  The regulators are looking into this and Janet Yellen has said the treasury is too – though it will be tough to make a crackdown here, as there are tens if not hundreds of thousands of small retail traders making the bets and coordinating on chat boards like Reddit.  It’s undoubtedly market manipulation, but investigating this will prove incredibly costly and time consuming.  The suggestion from one regulator is that the NYSE should suspend trading in the stock for 30 days to allow things to cool off – however there are already other heavily shorted stocks in the sights of these traders and they’d probably just go again on another.   The other approach is to increase the policing of the platforms that these trades are executed on.

The central bank that really got the cat amongst the pigeons yesterday was the ECB:  One of their more hawkish members, Klaas Knot, hit the news wires with comments that the ECB are watching the strength of the Euro and has tools to counter the rises in its value.  He also said that the ECB hadn’t reached the lower bounds of its interest rate policy either.  Comments from such a known policy hawk were enough to jawbone the Euro lower against the Dollar and that theme further accelerated after the Fed spoke and risk came off.  The Euro’s rise in value was one of the star performances over 2020, but such strengthening does come at a cost to the bloc’s exports and inflation hopes, with the former becoming more expensive and the latter softening because imports become cheaper.  The ECB has a strong track record of talking tough enough about what they’ve got left in their arsenal to not actually have to use it, so we don’t expect any changes or tweaks in policy, as long as the market plays ball.

From the UK:  News from the SMMT shows car production in 2020 was at its lowest level since 1984.  Output fell by a third to 921k vehicles- the first time it’s been below a million since 2009 – as the pandemic forced factories to close, consumer demand slowed considerably and, in the last few weeks of last year, some production lines were partially suspended because of parts availability issues.  However, there is reason to be optimistic, as the Brexit deal does include cars and there has been confirmation that Nissan are expanding their battery production capabilities in Sunderland, a move many will have to follow, as under the terms of the trade deal batteries for all new vehicles will have to be sourced from the UK or Europe.  The EU has already earmarked a massive investment in building out giga factories, but the UK government is yet to commit to a similar scheme, though hopefully it’s something that is high on the list given the benefits such projects would yield.

Boris is set to unveil a lockdown exit strategy in a few weeks’ time, having said yesterday that schools wouldn’t go back until at least the 8th March.  The thinking is that Schools might get back in March, shops might re-open in April and then hospitality could be back in May – albeit all with social distancing and perhaps regional variations.
A large study by Imperial College London shows that the R number is currently between 0.92 and 1.04 in England, with one in 64 people in the UK currently infected – which is moving in the right direction, but not quickly enough to alleviate the massive pressures on the health service.

On the continent: Norway is set to close its borders to all but essential visits.  They say that the mutations are very widely spread and that it’s because countries don’t have genetic sequencing capabilities such as the UK, Norway and Denmark have that they’re not picking up the variants, not because they’re not in circulation.

Over in the US:  The new secretary of state Antony Blinken has said that China “is arguably the most important relationship that we have in the world” and that though there are some adverse aspects within that relationship, it’s in both countries’ interests to work together.  The conciliatory tone is a welcome one from a trade perspective and though we don’t expect any immediate roll back of tariffs and a de-escalation of tensions, it is a comforting opening statement – though Joe Biden on a call to Japanese PM promised to help defend the country and its interests from China! So you give with one hand…

Earnings season in the US has seen Apple break $100bn in quarterly revenues for the first time ever.  It’s also seen Tesla miss a profit forecast for the first time in a year.  Facebook has warned of ‘cross currents’ in 2021 (which should read: the regulators are coming for us) and there is a long list of companies announcing today.  The one we’re waiting for is Amazon and just how much more dominant they’ve been able to become in the last three months, but that doesn’t come until Tuesday.

Today’s data calendar is quite busy, with business confidence and inflation numbers from across Europe this morning and then US GDP, jobless claims and home sales this afternoon.

Be well


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