Volatility which dominated 2020 has not shown any signs of stopping in early 2021. There is reason to be optimistic as economies look to reopen following lockdown measures imposed due to Covid-19. However, with some investment markets reaching new all-time highs and the road to recovery not certain, investors remain cautious.
The GameStop affair
January ended with unsettled markets as amateur retail traders caused a trading frenzy in the US electronics retailer GameStop. As the momentum grew and drove the price upwards, the story hit major news headlines forming more of a crowd to speculate further. What began as a genuine piece of research that the retailer was potentially undervalued grew into an ideological ‘David vs Goliath’ struggle as the amateur traders took on big institutional hedge funds who had a lot to lose from a rising share price; having essentially placed bets that the price would fall.
This developing anger against institutions was heightened when trading restrictions were put in place on the shares effectively halting the surging price rise. Institutional investors were disturbed by the moves and volatility increased in other assets as large market makers reduced their activity fearing they may get caught on the wrong side of any similar trades. The ramifications of this episode will play out in the months and years to come as US regulators investigate market manipulation from both sides. The frenzy however meant markets ended January on the back foot.
Markets finely balanced
In contrast, investment markets began February on a much calmer note. The unsurprising news that 2020 resulted in the biggest slump to UK GDP since the ‘Great Frost’ of 1709 did little to move markets and the FTSE 100 trended sideways without any real direction up or down. A 9.9% decline in GDP would in any other circumstances result in market panic, however this figure was to be expected given lockdown measures and the obvious decline in economic activity. As a result, markets treated the figure merely as a data point and looked onwards to the future and how the economy can recover.
In the UK, markets found their direction after positive news regarding the quantity and efficacy of vaccines led to the best day for UK shares so far this year. The FTSE 100 rose 2.5% on the news, mostly driven by energy and oil companies who benefitted from a rise in underlying commodity prices as the outlook for them grew more positive. This rise in commodity prices was not purely optimism, OPEC have continued reducing supply, and record low temperatures, which saw snow in Texas has disrupted production in the US. Together these provided a boost for the large cap UK index which was largely unmoved for the first two weeks of February.
As the month continued to progress, markets grew more volatile after inflation measures were higher than forecast. Central banks have indicated a willingness to let inflation run a little if it materialises and so the prospect of rising interest rates appears less likely. If inflation expectations do pick up in the longer-term however, rising bond yields could provide a lure back to safer assets. This quandary hangs over markets adding another layer of volatility.
Currency movements
Pound sterling has been one of the strongest performing currencies in 2021 so far reaching 1.40 against the dollar, a level the currency has rarely been close to since the Brexit referendum in 2016. This is due to the successful first stage of the UK’s vaccination programme and the potential reopening of the economy. Furthermore, sterling’s attractiveness to foreign investors has grown following comments made by the Bank of England indicating that negative interest rates are unlikely in the near term; something Central Banks in other countries around the world have been less assertive about.
The speculative rise in Bitcoin continued as the cryptocurrency hit another milestone crossing $50,000 for the first time on the 16th of February. The cryptocurrency has been on a strong run since the latter half of 2020. The performance perhaps mirrors the GameStop saga with the rising price fuelling the momentum of other speculators not wanting to miss out on the rising price.
Invitation
Although we have highlighted volatility created by speculators attempting to make quick profits from changes in the value of GameStop shares and the BitCoin cryptocurrency, we wish to remind our clients that we do not chase short term returns by engaging in such speculative activity when building our portfolios. Instead, we build diversified investment portfolios for the long term, managed at a level of risk which is appropriate to you and agreed with your Financial Planner.
If you would like to discuss anything in this update, please contact your Financial Planner here at Vesta Wealth in Cumbria, Teesside and across the North of England. Note that the information in this market update represents the views of the Investment Managers at Vesta Wealth Limited at the time of writing, which may change.
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This content is for information purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult your Financial Planner here at Vesta Wealth in Cumbria, Teesside and across the North of England.