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Market Review January 2021

  • Robert Santarpia

January 2021 proved to be a volatile month for the world economy and financial markets. After achieving record highs earlier in the month, stock markets world wide recorded their worst week since at least October 2020 as a rise in market volatility (aided by the GameStop ‘Short Squeeze Trade’) led to investor fears of a market sell-off. On a positive note, IMF has boosted its growth forecast for the world economy however airline sector continues to remain in the eye of the storm as covid-19 pandemic continues to push Global Debt to historic levels.

IMF boosts Global Economy Outlook for 2021

The International Monetary Fund (IMF) has revised its outlook for the global economy during January 2021 and now expects the world economy to grow by 5.5% in 2021, i.e. a 0.3 percentage points improvement from its previous forecast provided during October 2020. For 2022, the IMF further expects the global GDP to rebound by 4.2%. The IMF’s revised forecast is based on increased momentum in covid-19 vaccination administration across the world however downside risks to the post pandemic recovery remain in the form of mutating covid-19 variants. Expanding on IMF’s revised outlook, IMF’s Chief Economist Gita Gopinath has noted that world economic recovery remains dependent on the outcome of the ongoing defining race between the mutating virus and the rollout of vaccines worldwide and on the continuing ability of policy responses to provide effective support till the end of the pandemic. It is also pertinent to note that there continues to remain a divergence in expectation on economic recovery of various parts of the world economy with IMF slashing its GDP forecasts for the euro zone by 1 percentage point to 4.2% for 2021 whereas the IMF has improved its outlook for growth of US economy by 2 percentage points to a 5.1% GDP growth on the back of a strong momentum witnessed in second half of 2020 and continuing fiscal support.

Airlines Continue to Remain in the Eye of the Covid-19 Storm with Increasing Travel Restrictions

Airlines have undoubtably been one of the worst hit business sectors due to covid-19. During January 2021 , the International Civil Aviation Organization (ICAO) has released its report, highlighting the plight of the airline sector, noting that the seating capacity for airlines fell by more than 50% YoY during 2020 with just 1.8 Billion passengers taking flights through 2020, compared with around 4.5 billion passengers in 2019.This has led to a staggering losses to the airline industry of around US$ 370 Billion with airports and air navigation service providers losing a further US$ 115 Billion and US$ 13 Billion respectively. ICAO expects the near term demand outlook for airline sector to remain depressed however depending on effectiveness of pandemic management and vaccine roll-out, the situation may improve in second half of 2021. Further depressing the forecast for airline sector, we are already starting to see increased travel restrictions and travel curbs across the globe with the threat of a mutating virus looming large on the prospects of the airline sector and it is likely that airlines across EU, UK , Asia and U.S. will require more Government funding to withstand the increasing travel related barriers being put in place by various Governments. Safe to say, the airline sector has continued to remain in the eye of the storm with the dawn of 2021 as well.

Covid-19 Pandemic Has Increased Global Debt to Historic Levels

In the battle against covid-19, governments around the globe are on the cusp of becoming more indebted than at any point in modern history, surpassing levels achieved during World War II. At the same time, given the added liquidity in the market owing to Govt. stimulus, corporations are selling bonds like never before. According to Institute of International Finance, this has led to an unprecedented growth of US$ 19.5 Trillion in Global debt during the year ended 2020. The bills run up in the fight against the coronavirus vary greatly from country to country. Developed nations, with easier access to capital markets, have spent more to shore up their economies, while emerging-market governments have had to do so with fewer resources.

Although this huge debt pile may look manageable given the historic low interest rates prevailing in the world currently, if there is a rebound in global economy leading to higher inflation expectation and an eventual increase in interest rates, the debt levels may start looking unsustainable. Post World War II, it was the unprecedented growth in 50s, 60s and 70s that saved the day however the cumulative debt pile this time round may prove to be a bigger challenge for the world economy especially for the relatively vulnerable economies of developing world.

January 2021 was all about GameStop ‘Short-Squeeze’ Trade that has Shaken Financial Markets with Social Media Emerging as a Disruptor!

GameStop is a video game retailer which has become one of the hottest stocks this year in a tale that illustrates the changing face of investing and world financial markets. The stock has surged despite the retailer loosing huge money in 2020 and with plans to close down around 450 stores. The stock ended January 2021 at a staggering price of US$ 325 per share. The 52 week share price range of $2.57 to $483 underlines the fluctuating fortunes the company has witnessed recently. However, make no mistake, the GameStop share price fluctuations in the past week have not been about any changes to the fundamental story of the stock. Social media users on reddit noticed that a hedge fund had taken massive short positions on GameStop stock. These social media users started a thread and convinced everyone to join forces to buy as much of the stock as possible. The campaign gained significant momentum with users joining in and buying GameStop stock and in the process pushing up its price. This made the price of the stock increase significantly and led to massive losses on the short selling position leading to the short sellers having to buy back the stock at a much higher price, what is called in the investing jargon as a “short-squeeze”.

Investors on the social media forums have been promoting GameStop aggressively, with many pitching it as a battle of regular people versus hedge funds and big Wall Street firms. This saga has brought a new age phenomenon to wall street and is yet another reminder of the disruptive power of social media.

Markets end January 2021 with Weekly Losses amid Rise in Volatility

Shares on Wall Street following European bourses ended the last week of January 2021 on a downward trend as an intensifying battle between retail traders and brokers/ hedge funds over a handful of closely followed stocks significantly drove up market measures of volatility. The S&P 500 declined by 1.9% at the close of trade on Friday 29th January 2021 ending the blue-chip benchmark’s worst week since October 2020. The tech-heavy Nasdaq Composite also dropped by 2% on weekly basis. A rise in volatility typically encourages investors to reduce risk, helping to explain the decline from record highs witnessed in earlier parts of January 2021.

As shown in the graph above, the CBOE Vix (a measure of expected volatility known as Wall Street’s “fear gauge”) ended at 32.4, well above its long-term average of just below 20. Europe’s benchmark STOXX 600 index closed 1.9% lower diuring the week ended 29th January 2021, while London’s FTSE 100 benchmark slid 1.8 per% and Frankfurt’s XETRA Dax sank 1.7% mainly due to the increase in volatility triggered by the trading tussle explained above and the rising worries among European investors in relation to the economic damage being caused by the pandemic and fears of shortages in vaccines rollouts.

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