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Weekly market update - 1st of February 2021

Written and accurate as at: Feb 01, 2021 Current Stats & Facts

Equity indices fell last week in a remarkable few days of market activity. A frenzy on social media forum Reddit triggered a squeeze on some heavily-shorted US stocks. This forced the hedge funds who were short to de-leverage and sell down long positions, dragging on the US market.  This drawdown was reinforced by concerns over the impact of new Covid strains on vaccine efficacy and the shambles in the EU over vaccine supply. In Australia, this led to a large unwind in cyclical stocks seeing our market (ASX300) decline by 3.29% whereas the US (S&P500) down 3.29%.

We see three key issues facing markets and sentiment in the near term:

  1. The impact of retail investors, market speculation and views of valuation
  2. Concerns over the vaccine roll-out
  3. Risk of economic slowdown

Issue 1: Market sentiment / retail investor impact

Retail investor participation ramped up in 2020 and has recently hit new highs. Sitting at about 15% of US volumes before Covid, lockdowns and stimulus pushed it to 29% mid-year before it fell back to 23% in September. In recent weeks it has returned to about 30% of daily volume. This has been accompanied by greater use of leverage, which can be seen in options activity.

This retail activity is another feature of the current market environment which, alongside stimulus payments and liquidity, is driving speculative activity. Importantly, this activity is concentrated in specific pockets of the market, eg Tesla, Bitcoin, Renewable Energy ETFs and IPOs. Higher retail activity is another symptom.

Markets have been rising so people are making money. Stimulus cheques have just been received in the US with more to come and both lockdowns and cold weather give people more time.  Coupled with low-cost, easy investment platforms combined with social media raise interest and insights may suggest retail participation is likely to remain a factor for the next few months.

Issue 2: Vaccination and re-opening timeline

The key question is whether new data on vaccines (i.e. showing lower efficacy to the South Africa variant and the manufacturing issues in EU delay economic re-opening) will halt progress.  Most agree these may cause a small delay of one to two months and likely limit the level of international travel for longer. But fundamentally it does appear to prevent us from reaching herd immunity or diminishing the more serious effects of Covid.

There was a lot of data to digest last week.

The Novavax vaccine trial data showed efficacy as good as Moderna’s — with better tolerance and a great ability to quickly ramp up production. A 65% jump in Novavax stock reflected how well the trial was received. Australia has signed up for 51 million doses of this vaccine.

Trials in the UK and South Africa showed efficacy fell from 96% for the original strain to 86% for the UK variant and 49% for the South African version (60% for patients without HIV). They plan to develop a booster to deal with this, likely to be available in Q3. But this partial immunity still protects against severe infections — even for the South African strain.

The Johnson & Johnson vaccine was more disappointing. Overall efficacy was around 66% — 72% for the original strain, down to 57% for the South African variant. While it may be less effective than other vaccines at stopping infection, it is still very effective in preventing severe infections. As such, it will play a role in alleviating pressure on health care systems and reducing mortality. The company is also running two-dose trials which may lead to improved results. This is important because it’s a key part of the European supply and can be rolled out more easily.

There are now two paths countries can go down:

  1. Open up the economy earlier and accept the virus will be prevalent in the community — albeit at a lower incidence level but with severe infection becoming increasingly rare. This is much like the existing flu. Some suspect the US and Europe may choose this path, with vaccines such as Johnson & Johnson’s playing a role.
  2. Seek immunity from a mild incidence of the disease, wait for boosters and maintain some constraints. This may be where Australia goes.

Despite the concerns, vaccinations continue apace. Rates are accelerating in the US and the UK. Europe is lagging due to supply and logistics.

The rate of vaccinations in the US is up 35% week-on-week – passing Biden’s goal of 1 million per day. The goal is now 1.5 million per day, with the potential to achieve 2 million per day – the UK’s current run rate.

Lockdown measures have led to a clear improvement in new case numbers. The US is back to early November levels, half that of the peak earlier in January. This is flowing through to hospitalisations. ICU capacity has materially improved in most US states. The pace of improvement could accelerate further as the effects of vaccinations flow on through February. 

Issue 3: The risk of economic slowdown

The final concern is whether mutant strains will have a material effect on the path to normalisation and economic growth.  In coming weeks countries leading on vaccinations should start to see a material improvement in cases and hospitalisations. This should improve confidence in opportunities for economic re-opening. 

The Fed last week made it clear that near-terms risks relating to vaccine distribution and efficacy reinforce their view that they will not be considering balance sheet tapering for a long time.

We also saw the EU indicate that they may need to cut rates again — recognising specific problems with vaccine roll-out in the region, alongside the strong Euro.

We still see strong near-term drivers of economic demand. In 2020 the relaxation of US lockdowns was accompanied by the reduced stimulus. This time around, the relaxation will be in concert with more stimulus. This should be a strong tailwind for demand, through both income growth and use of still high excess savings.


Last week’s fall in equity markets pushed the S&P 500 down 1% for the month. The S&P/ASX 300 was up 1.5%. US 10-year Treasuries were stable for the week ending the month up 15bp.

Iron ore sold off 7% last week, copper also rolled over. Oil remained flat. There is a risk to the oil price if mutations delay international travel longer than first thought.

It is worth noting that the USD has not strengthened and credit spreads have remained stable. This reinforces the view that current market weakness is related to the pressure on positions exerted by retail rather than something more fundamental.

Resources led the fall last week, down 7%. Energy (-8.9%) gave back almost all its month-to-date gains. Defensives performed best – probably because they are under-owned rather than any shift on fundamentals.

Highly shorted stocks such as IDP Education (IEL, +12.6%) and A2 Milk (A2M, +5.5%) were among the market’s best performers.

Reliance Worldwide (RWC, +3.1%) upgraded guidance based on strength in its European segment. The UK was stronger than market expectations.

Atlas Arteria (ALX, +2.9%) delivered a well-received update on traffic numbers for its French asset APRR. Traffic was down 25% year-on-year for December. But this was half the 51% year-on-year fall of the previous lockdown. Heavy vehicle traffic, which provides a higher proportionate share of tolls, was only down 2%.

BlueScope Steel (BSL, -2.5%) announced an upgrade on improved earnings and margins. The latter is particularly strong in the US, where mothballed steel capacity is yet to be brought back online.  Broader weakness in the materials sector dragged the stock down.

ResMed’s (RMD, -2.4%) result on Friday night was better than expectations, but the stock got hit hard in the US (-7%). This is something to watch with regard to other growth names as they report in the coming weeks.

Ampol (ALD, -14.9%) led the energy names down. Concerns over the outlook for oil weighed on companies like Beach (BPT, -12.0%), Oil Search (OSH, -10.8%) and Santos (STO, -9.7%). ALD fell following an off-market buy-back which saw a high degree of scale-backs (a reduction in the proportion of shares offered which the company actually buys back). 

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