Silver lining as Reddit #silversqueeze pushes prices to 7 year high

US markets suffered their worst weekly decline since October last week, as the volatility inspired by the tug of war around GameStop and other heavily shorted company stocks raised concerns about the fallout that may come about from well intentioned, but ill-informed political interventions.

The passions being aroused by these events are also causing significant concerns about the wider implications about other areas of the market that might be over-leveraged, as the big unsustainable gains in these vulnerable stocks causes de-risking in other areas of the market.

Asia markets managed to start the week in a slightly more positive fashion, despite some weaker than expected Chinese manufacturing PMI numbers for January and this in turn has prompted a similarly upbeat start to trading for European markets after what turned out to be a disappointing January performance.

The best performers in early trade are in the basic resource sector as with the likes of Fresnillo, which is up over 12%, as well as Glencore, BHP and Anglo-American move higher as silver prices hit their highest levels since 2013.

Housebuilders also appear to be getting a lift, perhaps on optimism over the UK economy seeing an easing of restrictions sooner rather than later as the vaccine rollout hits a new milestone as the government announced that all care home residents had been offered a jab.

The worst performers are the big oil majors, lagging behind the rest of the market ahead of their full year numbers later this week, with BP due tomorrow. BP this morning announced the sale of a 20% stake in its Oman gas block program for $2.6bn as it continued its program of disposals, as it looks to get its debt pile down to its longer-term target of $35bn. At the end of the last quarter the company’s debt pile was $40.4bn.

Ryanair this morning became the latest airline to post a thumping loss in Q3, after similarly weak numbers from EasyJet and Wizz Air last week. Revenues came in at €341m well below estimates, while losses came in at €306m.

The airline said it expected full year losses to come in between €850m and €950m as the various lockdowns across Europe, keep aircraft grounded and passengers at home. Last week EasyJet saw an 88% fall in passenger numbers, while Wizz Air saw a 77% decline. Ryanair’s numbers were no better, with a fall of 78%, with the Easter period set to be a write off.

As airlines like Lufthansa and Air France tap their respective governments for state aid, Ryanair Michael O’Leary took aim at these bailouts by asking a European court to cancel the approval of Lufthansa’s bailout in particular, claiming, with some justification that they help the big players at the expense of smaller airlines.

O’Leary went on to say that he expects there to be a huge amount of pent-up demand for short haul travel, once things start to return to normal, with a return of normal travel capacity of 50%-70% in the summer, and a very strong recovery into 2022 and 2023.

In the longer-term O’Leary may well be correct, however he may be being slightly over optimistic with respect to this year, given how far behind the EU is with its own vaccination program. There is also the very real prospect that a lot of countries, or even holiday resorts, might go down the route of vaccine passports, which could create a further barrier to overseas travel.

While it is true there will always be a certain cohort of people who will always want to get on a plane once they are able to do so, you will probably find a lot of people may well decide to stay at home rather than run the risk of being involved in the lottery of a foreign holiday, when the virus is still being tackled across the world.

It’s slowly becoming apparent that 2021 is likely to be as equally as challenging for the travel sector as 2020 was, with little prospect of a return to normal much before the spring of 2022.

Despite the bleakness of this morning’s update there seems to be a marked reluctance to indulge in heavy selling in early trade, perhaps due to nervousness around short positions in airline stocks, after last week’s big surge in American Airlines.   

AstraZeneca shares are still in the spotlight as the politics around vaccine supply chains continue to take centre stage, on reports that the company is set to provide an extra 9m of vaccine supplies, as the fall out continues to rage from the EU’s huge faux pas in announcing they might impose a vaccine border in Ireland.

Reports that France and Germany might look at legal action against the pharma giant are unlikely to change the fact that the EU has botched its vaccine program with European countries seemingly content to take the line of least resistance when it comes to who to blame, shooting the messenger, rather than looking at the incompetence which is much closer to home in Brussels.

On the plus side the EU Medicines Agency has finally given full approval to the AstraZeneca jab to be administered to all over 18’s, albeit several weeks after everyone else.

JD Sports shares have risen this morning after the company announced a conditional agreement to the purchase of Maryland based sportswear retailer DTLR for $495m, as it continues to boost its brand across the US, having acquired Finish Line in 2018.

Continuing with the clothing theme, ASOS confirmed this morning that it has acquired the brands of Topshop, Topman, Miss Selfridge and HIIT brands for £265m, fully funded from cash reserves, and to be completed by 4th February.

Additionally, £30m of stock will also be purchased to support initial trading as the brands get migrated into the brands product cycle. One off integration cost is expected to be in the region of £20m.  

The company also said it is accelerating its US strategy with its partnership with Nordstrom.  

Ferguson shares are higher after confirming it had completed the disposal of its Wolseley UK plumbing and heating business to Clayton, Dubilier and Rice.  Details around the amount of a special dividend are expected to come at a later date.  

It’s good news for Hargreaves Lansdown shareholders after the broker hiked its dividend by 6%, after gaining, 84k new clients and £3.2bn of new business in the first six months of the year, with a lot of these new customers in the 30-45 age range.

The euro is underperforming this morning after the latest German retail sales numbers for December showed a massive -9.6% decline. This was much higher than expected, even accounting for the fact that Germany was in a tight lockdown for most of the month. Weaker than expected manufacturing PMI numbers for January aren’t helping either with economic activity in Spain slipping back into contraction, at 49.3. Italy manufacturing, by contrast surged to 55.1, close to a three-year high, while France came in at 51.6, and Germany at 57.1.   

The pound continues to benefit from the positive news around the UK vaccine rollout program, pushing up to eight-month highs against the euro.

Silver prices have seen a big move to the upside as the Reddit crowd turn their attention away from GameStop, to the precious metals market. The forum had multiple mentions of the hashtag #silversqueeze, prompting a big move higher, sending the metal back towards its August 2020 highs.

With all the focus now on the precious metals market, US markets look set for a positive start to the week, on the hope that the shift in focus for retail traders towards silver will give equity investors a break, from all the shenanigans around the likes of GameStop and AMC Entertainment, and other stocks that have been heavily shorted.  

The latest ISM manufacturing surveys have shown that the US economy is performing well, albeit with higher rates of unemployment. The latest survey for January is expected to see manufacturing activity at levels close to 60, with a close attention likely to be on the employment components ahead of this week’s US payrolls report.

Dow Jones is expected to open 198 points higher at 30,180.

S&P500 is expected to open 26 points higher at 3,740.