Swissquote Bank: Game is not over yet

January 29, 2021

The major US indices rebounded on Thursday, as the US fourth quarter growth data came in softer-than-expected and the GDP price index, a gauge of inflation, fell from 3.5% to 2% quarter-on-quarter, faster than analyst expectations which pointed at a slightly stronger 2.2%. The soft US data spurred the dovish Federal Reserve (Fed) expectations a day after the Fed announced its full commitment to support the economy until substantial progress is seen. The S&P500 gained near 1% following its biggest slide since October, as Nasdaq added 0.50%. 

Asian markets didn’t follow up on the European and US session gains. European and US futures slipped on rising worries regarding the mounting tensions over the retail speculation that has shaken Wall Street this week – yes I am talking about GameStop.

And the game is not over: Reddit wallstreetbets, which is now worldwide famous for having triggered the short squeeze in GameStop shares is now pointing at iShares Silver Trust, the world’s leading exchange-traded silver trust, as the ‘biggest short squeeze in the world’, enough for sending its army of home traders to the battle field.

Silver jumped a touch below the $27 per ounce as a result of a sudden rush to iShares Silver Trust, which saw its price jump by 5.5%. Whether the momentum picks up further is yet to be seen. 

Elsewhere, the US 10-year yield eased after climbing to 1.05%, and gold pushed higher for the first time after a six-consecutive-day slide. The yellow metal could attract some safe-haven flows before the weekly closing bell, as risk investors could have cold feet following the GameStop saga and its broader implications in terms of regulation and policy.

In the foreign exchange markets, the US dollar strengthened against its major G10 counterparts. The euro is testing the 1.21 support against the US dollar. The shortages in Covid vaccine push EU policymakers to block the AstraZeneca vaccine exports, which could gather the fury of its trade partners starting with the US and build the foundation of erratic trade relationships in the foreseeable future, which in turn would have an additional negative impact on the economic recovery.

Speaking of recovery, the French fourth quarter GDP slowed 1.3% only, versus a 4% decline penciled in by analysts following an 18% jump a quarter earlier. German exports fell more than expected in December. The euro gave a muted reaction to the data, but the latest figures leave a bitter taste given the rising prospects of a double-dip recession across Europe due to the unending Covid crisis.

Finally, WTI crude eased for the fourth straight session on soft US growth and rising prospects of a delayed recovery in global economic activity amid the mutation of the virus and the new lockdown measures. The fading demand prospects should continue weighing on oil prices, where the next natural bearish target stands at the $50 per barrel.  

Game’s Not Over 

The GameStop story is turning into a financial, and maybe soon to a political drama, where brokers which allowed the questionable race happen impose restrictions for trading the stock. It gives way to fury among ‘pajama traders’, the issue is even taken to the court by at least two traders.

Now the market is holding its breath to see how the small traders’ war declaration against the Wall Street giants will end.

There is little doubt that the short squeeze in GameStop shares is now a speculative bubble. Normally, we need to be very carefully with the use of ‘speculative bubble’. A bubble is not a bubble until it bursts, as investors give the market moves the benefit of doubt - the possibility that there is a real value behind a business which saw its stock price soaring. This is, for instance, how many feel about the race behind the Tesla shares. There are solid arguments supporting the rise in Tesla’s share price. The company has a solid business model; the world is turning towards achieving carbon-neutrality in the next 30 years and Tesla has got its business right - and probably a technology that could beat its rivals at least for now.

It’s however hard to give the same reasoning for GameStop. Fundamentally, there is little that justify the rise in its stock price other than a group of retail traders willing to go against Wall Street wolves. So the chances are, by the end of this story, the GameStop price comes down crushing and the saga ends. 

Yesterday, the GameStop shares slid 44% on the back of trading restrictions imposed by platforms of which they trade, yet rebounded by more than 60% in the after-trading hours as brokers announced to ease the trade restrictions.

The GameStop saga will end, leaving a sour taste in policymakers’ mouths. So, the story could be a trigger for action that could bring the government and the central bank to revise their ultra-lose policies, that throw liquidity in the middle, and not towards a reasonable target. This gives way to a poor transmission to the real economy, and unjustified valuation in the financial markets, both for Nasdaq stocks and Bitcoin than GameStop.

According to the latest news, the White House monitors the situation, and Senator Elizabeth Warren told regulators to ‘wake up and do their jobs.’ Regarding the rally in the blue-chip stocks since the March rebound, the small stock industry is not the only one that needs regulation.