- China Manufacturing PMI (Jan)
- ECM Monetary Policy Statement
- US Nonfarm Payrolls & Employment Rate (Jan)
Thought Of The Week
Slowdown in US Economic Rebound, FOMC Meeting
Despite US GDP advancing by 4% in the last quarter of 2020, the economy shrank by 3.5% for the full year, recording its worst contraction in decades. Dichotomy of the recovery was also observed from the slowing consumer spending as households became more cautious while other parts of the economy continued to shine. Business investment spending grew at a solid pace of 13.8%, driven by firms spending on equipment and momentum in home sales also helped to power construction. Although jobless claims came in lower than expected, employment continues to be under pressure as tighter restrictions are imposed again due to the resurgence of coronavirus, dealing another blow to the ailing labour market.
Key message from the Federal Open Market Committee (FOMC) meeting was largely aligned with market expectations. Federal Reserve Chairman Jerome Powell reiterated its pledge to hold benchmark interest rate near zero and maintain bond purchases of $120 billion per month until “substantial further progress” towards its employment and inflation goals are achieved. Markets were wild this week with CBOE Volatility Index (VIX) spiking to 62% to 37.21 on Wednesday as retail traders continued to wage their battle again hedge funds.
Dominating headlines this week was the dizzying rally of GameStop, which rocketed almost 1,800% since the start of 2021. This frenzy was powered by a coordinated effort by an army of day traders on Reddit, who were equipped with the access to free trading platforms and excess cash to punt on stocks. The Redditors had a clear goal to flush out hedge funds who had short positions on GameStop namely, Melvin Capital and Citron Research. By banding together to purchase deeply out-of-the-market call options, the day traders were able to drive up the price of the underlying stock up to the strike prices, forcing dealers to continually hedge their own exposures which in turn accelerates the sensitivity of the option prices to changes in the price of the underlying security. Buying call options give the holders a right to buy the stock at a pre-determined price within a certain date and magnifies gains/losses through leverage.
Trading volumes have been on a rise since last year but the smaller sizes per trade indicate that this phenomenon was led by retail investors rather than big institutions. The frenzy further escalated to numerous lawsuits against Robinhood by its users after the platform took steps to restrict buying in the high-flying stocks. Other heavily shorted stocks by hedge funds that are on the radar list include AMC Entertainment Holdings, Blackberry and Bed Bath & Beyond, which have all surged more than 100% this year.
Chart Of The Week
Options Contracts Surge As GameStop Frenzy Continues
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