Unprecedented trading activity over the past week delivered a rare victory to the small retail trader and crushing defeat to hedge funds and giant short-sellers. Wall Street watched in awe as companies with terrible fundamentals saw relentless option buying by retail investors take advantage of a structural weakness in markets. The battle over GameStop is far from over but there have been huge casualties. Citron Research announced that after 20 years of providing short-selling research, they are shifting to focusing on long side opportunities. Some hedge funds required rescue financing and some retail traders mistimed the meteoric rise in many stocks.
In a busy trading week that contained a FOMC decision, Apple’s supercycle earnings results, and a plethora of news on the COVID, financial markets remained fixated on GameStop madness, Robinhood backlash, and limitless questions on how the SEC and Congress will respond. A solution for this entire market dislocation will take time and that could suggest this insane trading will continue a little while longer.
US stocks are poised for the worst week since the before the US presidential election as ludicrous retail trading shows no signs of ebbing. There was a lot of froth in the stock market before retail traders took GameStop and other companies with terrible fundamentals to astronomical valuations. Wall Street is broken and despite a dovish Fed, a trillion dollars in fiscal support being just around the corner, strong mega-cap tech earnings, and positive vaccine news, a shift in drivers on Wall Street is triggering a strong red wave of risk aversion across the board.
J&J's one-shot, easily refrigerated COVID vaccine provided another round of great news for the fight against coronavirus. Initially risk appetite focused on the 66% efficacy against COVID in a large 43,783 global trial, but once investors processed the entire study, and realized it was effective against severe infections, optimism returned. Moderna and Pfizer set the bar high with their COVID vaccines being over 90% effective against infection, but that doesn't mean J&J's will not change the global vaccination landscape. J&J's COVID vaccine is 85% effective against severe infections and complete protection against COVID hospitalizations and death.
Covavax also delivered strong results with their 15,000 study showing the COVID vaccine having a 89.3% effective prevention of symptomatic Covid-19. Covavax was 60% effective with HIV negative participants in its second trial in South Africa. Virus variants will complicate how soon we return to pre-pandemic life, but so far optimism remains in large parts of the world that a return to normal is closer to the end of the year.
Crude prices got a double dose of good news on the demand front after J&J and Novavax delivered positive late stage studies with COVID vaccines. The world’s vaccine supply problem will greatly improve now that we have two more vaccines added to the arsenal. Despite good news on the COVID vaccine front, oil prices are not immune to a general risk-off tone that is hitting financial markets. The vaccine news however is not all positive as Germany maintains their AstraZeneca COVID vaccine shot recommendation for individuals between 18-64 years old.
While the US is slowly moving beyond the holiday season peak in new cases, the decline of new infections is slowing, and concerns remain elevated that the virus variants are spreading nationwide. Short-term risks remain to the crude demand outlook and dollar positioning suggests a rebound could provide a tentative headwind for commodities. The narrative has not changed much for WTI crude and that should suggest the current consolidation can last a little while longer.
Gold prices were all over the map today as investors scratched their heads on how to react to the J&J vaccine news, a resumption of the GameStop stock trading mania, rising inflation data, and as global stocks post the worst decline since just before the US presidential election. Gold is playing tug-of-war at the $1,850 level and when all the dust settles prices should settle higher given positive developments with the reflation trade. The core PCE deflator surged 0.3% from a flat reading in the prior month. The higher the baseline for inflation before the return to pre-pandemic life, the stronger traders will pile back into gold for their inflationary hedges.
It seems gold could start to climb higher as long as a massive dollar short squeeze doesn’t occur and a significant stock market selloff triggers panic selling for the precious metal. Wall Street turned volatile thanks to GameStop Mania and if that type of trading translates into a wave of retail bets for silver, that could prove somewhat negative for gold over the next couple of weeks.
Elon Musk changing of his twitter bio to Bitcoin unleashed his army of followers to pile back into the world’s largest cryptocurrency. You can also say he is responsible for taking the global crypto market cap back above $1 trillion. Bitcoin got lost in the GameStop mania and Musk’s tweet brought cryptos back into the limelight. Bitcoin is slowly making its way closer towards $40,000 and that will be the true test if this consolidation period is over. For Bitcoin to shine, retail stonk trading needs to ease and that seems like that could be happening in the not too distant future.