Volatility in currency and in particular equity markets spiked last week. The VIX, a measure of volatility in the S&P 500, jumped above 37 mid-week to its highest level since the US elections on 3rd November. The big story was that institutional investors’ significant short equity positions in until-now little known US tech stocks (including GameStop) were squeezed by retail investors driving up the price of these shares. Forced to cover their shorts institutional investors further fuelled the rally in these stocks and a number of hedge funds are posting large losses.
The broader rebalancing of institutional investors’ equity positions saw the S&P 500 end the week down 3.3%, with almost four weeks of gains wiped out. A number of trading platforms have instituted trading caps or suspensions but this “battle” between retail and institutional investors likely has further to run.
The “safe-haven” US Dollar gained 0.6% in trade-weighted terms last week, hitting a two-month high on 29th January. There were few surprises from the Federal Reserve’s policy meeting with Chairperson Powell talking down the odds of a near-term tapering of the central bank’s QE program. US GDP growth slowed to 4.0% qoq (annualised) in Q4, broadly in line with expectations.
The mid-week up-tick in FX volatility was admittedly far less pronounced, with global FX volatility still in line with its 10-year average. While the yo-yo of equity markets likely fed through to major currencies, a number of country specific and regional factors also played their part in driving currencies’ performance. In particular the spat between the United Kingdom and European Union over the production and distribution of the AstraZeneca and Pfizer vaccines contributed to a reasonably wide GBP/EUR range of 1.123-1.134. The European Commission, which at one point had threatened to halt Pfizer’s vaccine exports from its Brussels plant to the UK and to re-introduce border controls in Ireland, has backed down.
The British government has arguably come out of this far better and the GBP/EUR cross is currently trading within touching distance of its strongest level since mid-May. The fact that the UK has given almost nine million people at least one dose of the vaccine along with better-than-expected labour market data for November-December have also arguably provided some Sterling support. In trade-weighted terms it gained about 0.3% last week and the question now is whether and when GBP/USD will breach 1.375 – seemingly a “ceiling” in the past ten days.
The Australian Dollar was the underperformer last week, depreciating about 1% to its lowest level in a month, despite the release of higher-than expected domestic CPI-inflation data for Q4. The Kiwi Dollar trade-weighted index was broadly unchanged.
