Pro-cyclical stimulus and vaccines create tailwinds for global markets

European equity markets traded higher on Tuesday, recovering the losses of Monday’s soft session after a largely positive, though choppy, day on Wall Street. Tech stocks led by Apple dragged the broader US market higher ahead of an expected strong earnings season, whilst small caps were weaker. Asian shares traded broadly weaker overnight. 

Joe Biden’s stimulus plans appear to face being watered down to appease lawmakers on the Republican side, with the president saying he’s open to narrowing eligibility for the $1,400 stimulus cheques for every American that form the centrepiece of the package. This should help the deal get through Congress, but the timing is becoming the issue – more delays on delays in the vaccine rollout are not supportive of risk appetite. Moreover, it’s becoming clear that governments are not going to lift restrictions as quickly as they might due to fears about mutations and vaccine delays. 

The EU has levelled criticism at AstraZeneca over vaccine supply shortages and Brussels is tightening exports of vaccines produced in the bloc. The UK Minister for Covid Vaccine Deployment Nadhim Zahawi said on Tuesday that vaccine supplies were "tight". EU health commissioner Stella Kyriakides said the EU would "take any action required to protect its citizens".  Spats over vaccine supply and delivery take the place of fishing quotas and level playing fields, underlining the new rivalry that exists between Britain and Europe.

Despite a report indicating that global trade volumes have recovered to pre-pandemic levels, the rotation-reopening plays are unwinding. Airline shares are down another 2-3% this morning. US 10-year yields retreated to 3-week lows and the dollar is finding bid again. Gold remains steady in the range around the $1,850/oz region. The problem is that investors have loaded up pretty heavily on the re-opening bets in the wake of the vaccine announcements last November, so concerns about the pace of the rollout of vaccines, the easing of restrictions and a return to normality could see a further unwind of this trade in the near-term. As I said last week, whilst monetary policy support, pro-cyclical stimulus and vaccines create tailwinds for global markets, a 5%-10% correction in equity indices is not out of the question in Q1.

Don’t stop me now: GameStop shares went on a gamma and short squeezing rollercoaster yesterday. Shares, which had jumped 51% to $65 on Friday, opened at about $85 and then surged to $160 before closing up 18% for the day at $76. A wild ride, and there will be others like it, if the Reddit /wallstreetbets message board is anything to go by. After-hours trading indicate it will open up another +15% higher, but who knows where this stock is heading now.  The rally came despite a double-downgrade from Telsey Advisory Group, which slashed its rating on the stock to underperform from outperform, noting a basic disconnect between fundamentals and valuation. “The sudden, sharp surge in GameStop’s share price and valuation likely has been fuelled by a short squeeze, given the high short interest, and, to a lesser degree, speculation by retail investors on forecasts for the new gaming cycle and the involvement of activist RC Ventures,” the analyst note said.

Rolls-Royce said expected cash outflows this year would be £2bn, more than double consensus forecasts. Full year 2020 free cash outflow was in line with previous guidance, whilst year-end liquidity stood at around £9 billion, at the upper end of the previously guided range, with £1bn cash cost savings from ‘mitigating actions’. Shares fell over 9% in early trade. Rolls has been battered by the pandemic as civil aviation activity has been smashed, but management expect to turn cash flow positive in the second half of the year as widebody flying hours pick up. The question is whether the pace of vaccine rollout and government easing of restrictions matches their expectations.

JD Sports confirmed it is looking at funding options to exploit opportunities in the retail space created by the pandemic. Following a Sky News report indicating the company is looking at a £400m share sale, the board confirmed this morning that it is exploring ‘additional funding options with a view to increasing its flexibility to invest in future strategic opportunities and that this may involve a non pre-emptive equity placing’. Recent high street troubles have shown there are opportunities to build out scale – e.g. the recent bidding for the carcasses of Arcadia, Debenhams. Meanwhile JD Sports has shown appetite for deals with its recent acquisition of US retailer Shoe Palace.