A Rise in Equities, Sovereign Debt Yields, and the Dollar as GameStop and Silver Swoon

February 2, 2021

The price of GameStop has imploded about 60% in the past 24 hours, and the other notable short squeeze has fallen back 6.3%. The removal of these unhealthy elements in financial markets has been beneficial overall. The S&P, DOW, and Nasdaq each opened about 1% higher. In the Pacific Rim earlier today, stock markets closed up 2.5% in India, 2.3% in Taiwan, 1.5% in Australia, 1.3% in South Korea, 1.2% in Hong Kong, 1.0% in Japan and 0.8% in China. Markets in Europe currently show daily gains of 1.4% in Spain, 1.6% in France, 1.0% in Germany, 0.7% in Italy and 0.6% in Great Britain.

Whereas gold (-1.6%) has followed silver lower, the price of West Texas Intermediate oil was lifted by the enormous winter storm in Northeastern U.S. and is up by 2.9% so far.

Ten-year U.S., German, and British sovereign debt yields have climbed three basis points each.

The dollar is 0.1-0.3% firmer against the euro, yen, sterling, Swiss franc, and Aussie dollar.

The first preliminary estimate of Euroland GDP last quarter shows a smaller-than-forecast contraction of 0.7% from 3Q (not annualized), resulting in a a 5.1% decline from the final quarter of 2019 and an average 6.8% negative growth rate in 2020. The second and fourth largest economies using the euro experienced negative growth: France down 1.3% on quarter and 3.9% on year; and Italy down 2.0% on quarter and 6.6% on year. Austrian GDP fell by an even more rapid 4.3% on quarter and 7.8% on year. But much slower yet still positive quarterly growth was achieved by the biggest economy in the group — Germany at 0.1% after 8.5% in 3Q — and the fourth largest Euroland economy Spain with a rise of 0.4% on quarter yet -9.1% on year.

GDP also rose in 4Q from 3Q by 0.4% in Portugal, 0.5% in Sweden, 0.3% in the Czech Republic, and 0.2% in Belgium. All the European economies reporting 4Q GDP today still showed negative on-year changes, the smallest drop of which was in Sweden (-2.6%).

French consumer prices rose 0.2% in January and accelerated to a 6-month year-on-year high increase of 0.6%.

The British Nationwide house price index slid 0.3% on month in January, depressing its 12-month rate of increase to a 3-month low of 6.4%.

The number of unemployed Spanish workers advanced 76.2 thousand last month, a bit more than double December’s increase.

Austria’s jobless rate of 11.4% last month was up from 11.0% in December and the most since June. In January 2020 before the pandemic, the rate stood at 8.7%.

South Korean consumer price inflation unexpectedly rose 0.1 percentage point to a 2-month high of 0.6% in January.

Growth in Japan’s monetary base continued to accelerate during January in response to a negative interest rate and relentless quantitative stimulus, reaching 18.9% year-on-year versus 17.0% in the final quarter of 2020, 9.1% on average in all of 2020, and 3.6% in 2019.

Thailand’s business confidence index fell 2.6 points to a 6-month low of 44.2 in January.

After customarily skipping of a January Board meeting, monthly policy reviews resumed in Australia where officials agreed to leave their Official Cash Rate unchanged at a record low of 0.1% where such has been since a 15-basis point in November. The OCR previously in 2020 had been cut twice in March by 25 basis points each time. The Reserve Bank of Australia is also conducting Aussie government bond purchases to keep its yield also near 0.1% and is doing such at a rate of A$ 5 billion per week. Governor Lowe’s statement explaining the decision notes that ” Australia’s success on the health front and the very significant fiscal and monetary support” have resulted in faster-than-expected economic recovery and projects 3.5% growth both this year and next with core CPI inflation of 1.25% in 2021 followed by 1.5% in 2022. The statement concludes with fairly explicit forward guidance that puts off an interest rate for about three years.

The Board will not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range. For this to occur, wages growth will have to be materially higher than it is currently. This will require significant gains in employment and a return to a tight labour market. The Board does not expect these conditions to be met until 2024 at the earliest.

In U.S. policy news, last night’s meeting between President Biden and ten Republican lawmakers ended with the president rejecting their bid to cut the size of his planned pandemic relief package by two-thirds and also telling them that the plan has to be put into law fairly soon whether that be with their support or through a reconciliation in which it gets only the support of Democrats.

Copyright 2021, Larry Greenberg. All rights reserved. No secondary distribution without express permission.

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