Wednesday, February 17, 2021

Axios Markets: The GameStop hearing will need a villain

Plus why it's all about Treasuries | Wednesday, February 17, 2021
 
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Axios Markets
By Dion Rabouin ·Feb 17, 2021

Good morning! Was this email forwarded to you? Sign up here. (Today's Smart Brevity count: 1,141 words, 4½ minutes.)

🕰 Trivia: A mathematician and an astronomer who authored a series of best-selling almanacs and built one of the first clocks in the U.S., this man is said to have helped design the city of Washington, D.C., by reproducing architect Charles L'Enfant's designs for every street, park and monument from memory after L'Enfant stormed off the project.

 
 
1 big thing: The bond market can change everything
Data: Investing.com; Chart: Axios Visuals

Yields on 10-year and 30-year U.S. Treasuries rose by the most in three months, as benchmark 10-year yields touched 1.33% early this morning, a one-year high.

Where it stands: There was no clear catalyst for the day's move, market analysts said, just like there has been no real catalyst for the continued bearish momentum that has driven prices down and yields up through the better part of this year.

Why it matters: The Treasury market is the world's most important and often drives price action in other assets.

  • It is currently suggesting the market could be entering a new environment.

The big picture: Last year saw the everything rally — equities, bonds, precious metals, emerging markets, commodities, currencies (against the dollar) and cryptocurrencies all boomed — but this year is so far delivering winners and losers.

Winners: Small-cap stocks have popped along with crypto and commodities like corn, cotton and sugar while oil has significantly outperformed.

  • Four of the world's top five performing major assets are gasoline, crude oil, natural gas, diesel and the S&P 500 energy index, per a WSJ analysis of FactSet data.

Losers: Long-dated U.S. Treasuries have been the worst-performing asset, and the dollar's resilience so far this year has reversed emerging market bond gains and sunk gold.

  • One of last year's top performing assets, orange juice, has delivered a -7.6% return so far in 2021.

Between the lines: Investors are clearly piling into assets that will benefit from a reopened economy and greater movement as well as higher inflation.

Watch this space: "With the 10-year yield slicing through 1.2%, it won't be long until treasury yields breach the S&P 500's dividend yield (~1.5%)," equity analysts at Jefferies wrote in a note to clients.

  • "This will probably coincide with the first test for the valuations of the higher PE stocks and the relative performance of the S&P 500 versus more loftier valued indices such as the Nasdaq 100."
  • "Our three gauges for the direction of US ten year treasury yields are all pointed vertical — particularly the relationship between US money supply and the US yield curve. Jefferies expects the 10-year to reach 2% by year-end."

The bottom line: Rising yields will put the Fed in an interesting position. Mortgage rates already are spiking higher for buyers and could threaten the equity market. If that happens, the Fed will be expected to act — delivering more liquidity and buying more long-dated bonds to bring yields back down to earth.

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2. Catch up quick

The Biden administration extended the federal ban on foreclosures and extended mortgage forbearance programs for homeowners with federally backed loans until the end of June. (CNN)

Kraft Heinz and Conagra said they may raise prices this year on some products that use wheat, sugar and other commodities that are becoming increasingly expensive due to high demand. (Reuters)

Several automakers, including GM, Ford, Toyota, Nissan and Honda, were forced to idle production at U.S. plants in the middle of the country thanks to winter storms that caused power outages and other disruptions. (Bloomberg)

TikTok owner ByteDance is looking to raise capital in the U.S. by listing shares of its Chinese-only short video sharing app Douyin in New York. (SCMP)

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3. House GameStop hearing will need a villain
Illustration of a hand operating a marionette attached to a stock trend line.

Illustration: Annelise Capossela/Axios

 

The House Financial Services Committee will convene a hearing tomorrow on "recent market volatility involving GameStop stock and other stocks" to continue the whodunnit of the current state of financial markets, especially U.S. stocks.

What's happening: Chair Maxine Waters will question the CEOs of Reddit, Robinhood, Citadel Securities, Melvin Capital and Keith Gill, also known as Roaring Kitty or u/DeepF--kingValue.

  • She will "examine the recent activity around GameStop (GME) stock and other impacted stocks with a focus on short selling, online trading platforms, gamification and their systemic impact on our capital markets and retail investors."

Between the lines: Waters has made clear who she believes the villains to be in this story, noting in a Jan. 28 press release that "[h]edge funds have a long history of predatory conduct and that conduct is entirely indefensible. Private funds preying on the pension funds of hard working Americans must be stopped."

Reality check: It's unclear how the hedge funds' speculative activity and predatory conduct hurt anyone besides their clients.

  • Most of the retail traders, including Gill, made money as a result of the hedge funds' short positions.
  • Even after the huge losses that GameStop shares suffered in the past two weeks, the stock remains nearly three times higher than its price at the beginning of the year and is more than 10 times higher than where it traded a year ago.
  • The volatility in GameStop and other "meme" stocks was largely contained to those stocks, while the overall market saw volatility decline and major indexes rise to record highs.

The big picture: That could mean the culprits for the excesses and wild swings in the market are elsewhere, and central bankers have spent the past week doing their best to keep eyes from looking in their direction.

What they're saying: St. Louis Fed president James Bullard became the latest central banker to insist that, in fact, there is no bubble. "You do see speculative frenzies from time to time in markets, and that's part of the process."

  • European Central Bank president Christine Lagarde last week sought to distance central banks from the discussion, arguing that market frenzies and inequality were "clearly ... not for central banks to address."
  • Fed chair Jerome Powell has outright denied that there's any sort of connection between central banks drowning markets in liquidity and bubble conditions.
  • And on Monday Bank of Japan governor Haruhiko Kuroda, who oversees a central bank that is the single largest stock holder in the country, chimed in: "Optimism over the global economic outlook and steady vaccine roll-outs may be behind the recent surge in stock prices."

This is despite essentially all of Wall Street, most former central bankers and their own research refuting such claims.

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4. The perils of prolonged unemployment
Animated illustration of a blinking cursor in a dialogue box on the outside of a packing box full of office supplies.

Illustration: Eniola Odetunde/Axios

 

Axios' Erica Pandey writes: Nearly 4 million Americans have been unemployed for 27 weeks or longer — trapped in a vicious cycle that makes it harder to get back to work.

The big picture: Long-term unemployment during a pandemic is a double whammy. Millions are experiencing food and housing insecurity and lack health care when they need it most.

What's happening: "The troubling amount of long-term unemployment and its continuing rise is dangerous for the U.S. labor market," says Nick Bunker, an economist at the jobs site Indeed. "A fast labor market recovery will help alleviate these concerns, but that bounce back is still a ways away and dependent on controlling the coronavirus."

  • The number of Americans experiencing long-term unemployment — around 4 million — is far from the worst of the Great Recession, when long-term unemployment reached 7 million.
  • But it's remarkable considering where the U.S. was before the pandemic. The long-term unemployment rate is 2.5%, which is comparable to the 3.5% overall unemployment rate in January 2020, Bunker notes.

Why it matters: Studies have shown that long-term unemployment hurts workers' physical and mental health, reports Bloomberg. And the longer someone is unemployed, the harder it is for that person to get another job — let alone another job at the same pay level.

Read the full article

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Thanks for reading!

Trivia: A mathematician and an astronomer who authored a series of best-selling almanacs and built one of the first clocks in the U.S., this man is said to have helped design the city of Washington, D.C., by reproducing architect Charles L'Enfant's designs for every street, park and monument from memory after L'Enfant stormed off the project.

Answer: Benjamin Banneker.

  • There is some dispute over Banneker's achievements, but I will say I find it hard to believe that a sufficient number of white record-keepers in the 18th century colluded to embellish the reputation of a Black man for no apparent reason.
 

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