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  • Risk is bid as stock markets extend bounce
  • Moonpig prices IPO at 350p, shares surge to 440p
  • Silver retreats from 8-year high, GameStop shares sink
  • Inflationary pressures reappear in manufacturing PMIs

Confidence has returned to global equity markets with stocks in Europe higher again this morning after bouncing back on Monday from a choppy final week of January. We can probably put this down to bears lacking any serious catalyst, the combination of stimulus and vaccines still underpinning a broad confidence, and Chinese repo market stress from last week is fading. The FTSE 100 rallied almost 1% and is up again but trailing European peers with BP down 3% on a collapse in 4th quarter profits to just $115m from $2.6bn last year. The DAX in Frankfurt was up 1.4% and added another 1% in early trade. After its worst week since October, Wall Street had its best day in two months yesterday. The S&P 500 rallied 1.6%, the Dow rose 0.76% and the Nasdaq added 2.55%. The small cap Russell 2000 rose almost 2.7% as reflationary pressure resurfaced and the US 10-year bond yield edged back towards 1.10%. WTI oil surged north of $54 amid signs of tight supply and rebounding manufacturing PMIs. More on inflation below.

Moonpig has priced its London IPO at 350p a share, valuing the company at £1.2bn, before shares surged 27% to 442p in early trade. The deal gives investors a 41% stake in the company with 140m shares sold., Moonpig has been a big beneficiary of lockdowns as card shops have been closed and consumers have found options online to send greetings cards – sales doubled in the six months to the end of October. Its market share is huge (60% of online cards in the UK in 2019) and the trend towards online that will last beyond the pandemic is supportive of future growth. Huge market share, strong growth prospects and good margins – what is not to like? Maybe the valuation, but as we have seen before that is hardly a barrier to online retail stocks. The strong debut, coming amid a flurry of deal activity that last week saw Dr Martens shares surge on debut in conditional dealing, is a sign investors are still willing to pay a premium for growth and a premium for names they are familiar with.

Silver retreated from an 8-year high at $30 to trade under $28 as of this morning. Shares in Fresnillo retreated 3% on the drop after surging yesterday. So far, the fallout in the markets from the Reddit-GameStop shenanigans has not been too large – it seems mainly to have caused some equity repositioning. Shorts have lost over $13bn on their GME positions, so there is bound to be a ripple effect in equities. Other markets not really affected – Treasuries not really doing much, gold, USD etc not really affected There is clearly risk of further repositioning-led volatility as funds de-risk and get out of positions, but for now it seems to be reasonably concentrated and not creating volatility outside of equity markets. We should note as well that the market is not overburdened by shorts – this is not a heavily shorted market by historic standards – the Fed has seen to that.

Outside of the specific market moves, repercussions for the industry are less clear cut at this stage. I would think hedge funds are going to be less inclined to make big naked short bets against single name stocks. They won’t want to stick their heads above the parapet. Presumably, this includes Renaissance Technologies, which reported a 9.5% slump in its equity fund in January. As we reported last week, Citron has already thrown in the towel. RobinHood’s IPO could certainly be a little trickier. But beyond this, it’s not so clear cut whether the Reddit story really leads. Finance is democratized by free trading – I don’t see how brokers who are obliged to raise their collateral at clearing houses to settle trades that are executed on their platforms really deserve the amount of baseless vitriol as they have received. Realisation that the GameStop/Melvin melt-up/blow-up will not leach across financial markets – despite the silver moves – is maybe another factor in the broad risk-on moves. There was something of a shock effect last week but this initial disruption has faded.

What’s next for the Reddit traders? First came GameStop, next was silver. Could Bitcoin be the next to get the Reddit treatment? Hedge funds are extremely net short on Bitcoin futures. According to the latest CFTC Traders in Financial Futures report, the net short position is the largest ever. Add to this the recent move by Elon Musk to put #Bitcoin in his Twitter profile, which sparked a $5k rally in Bitcoin, and you get the raw ingredients for something to happen. It’s not a great leap to make in one’s imagination to see Bitcoin bulls rally to Musk and squeeze shorts. Although we note Musk tweeting this morning ‘Off Twitter for a while’… I’m sure he will be back soon.

GME shares will return to $10 sooner or later once this has all passed the mania subsided. Yesterday shares dropped 30% and fell another 15% in after-hours trading to under $190 and dipped 30% in Frankfurt this morning to €140. Shorts are covering their positions after taking a $20bn last month. Short interest in GME fell to 39% of free-floating shares, from 114% in mid-January, data from IHS Markit shows. S3 Partners data paints a similar picture. With hedgies covered, the unwind will be brutal.

Commodity prices seem to be heading north. Looking past the current silver craze, we have talked in the past about a series of tailwinds for commodities in 2021 and there are signs that inflation seems to be coming. The latest IHS Markit US manufacturing PMI, which rose to a record high by accelerated expansions in output and new orders. Notably, however, cost pressures worsened amid raw material shortages, but firms passed this on as selling prices rose at the fastest pace since July 2008. The ISM PMI rose to 58.7, signalling healthy expansion, albeit it was a little short of the expected reading. It also noted inflationary pressures as the Prices Index surged to 10-year high last month, indicating continued supplier pricing power. The report showed every commodity bar caustic soda rising in price, with several, including electrical components, semiconductors and steel, in short supply

Consumer demand is picking up, but so too are supply chain troubles. A lack of shipping capacity (we’ve seen container rates go skywards) and shortage of raw materials is seeing lead times stretch way out. IHS chief business economist said: “These price pressures should ease assuming supply conditions start to improve soon but could result in some near-term uplift to consumer goods price inflation.”

Britain’s manufacturing sector is also seeing activity pick up, but more slowly than before. The increase in activity slowed sharply at the start of 2021, with output growth easing and new orders falling slightly as producers faced weaker inflows of new export work and temporary supply-chain disruptions caused by COVID-19 restrictions and transport delays. Again, inflation seems to be coming. Input price inflation rose to a four-year high in January, due to raw material shortages, transport delays and market forces.  This was passed on customers, leading to the steepest inflation of selling prices for 28 months.

The Reserve Bank of Australia left interest rates on hold but added another $100bn to its asset purchase programme in a surprise move that reflects the central bank’s pessimistic view for wage growth. AUDUSD was reasonably steady around 0.76 after the announcement but the near-term downtrend remains in force, looking to test the Jan 28th lows at 0.7590.

Stress in Chinese repo markets is fading and perhaps this is one of the major causes for the equity bounce back. Short-term money rates fell back to two-week lows on Tuesday as stress in interbank money markets seemed to ease. The Shanghai Interbank Offered Rate fell to 2.241% having earlier hit a six-year high of 3.194%.

In FX, sterling continues to trip the range against the dollar. The trend remains positive but GBPUSD keeps failing to break through at 1.3750/60. Meanwhile the euro is facing a big test vs the greenback as EURUSD tests the key horizontal support at 1.2050, having breached the 50-day SMA to the downside. The dollar slipped, however, giving some respite to the euro in early trade, as DXY retreated from trend resistance.

Chart: EURUSD test 1.2050, breach could call for 1.19440 area, then 23.6% retracement.

EURUSD test 1.2050, breach could call for 1.19440 area.

Chart: Dollar faces trend resistance.

Dollar faces trend resistance.

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