Mutations, bottlenecks and speculation

The stock markets started January in a good mood. However, this sentiment flattened out and turned negative towards the end of the month. This was due to concerns about Corona mutations and vaccine supply shortages on the one hand, and speculation by small investors on the other, which led to a "short squeeze".

The year 2021 began promising as the German DAX index reached a new all-time high in height of 14,050 points on 8 January. Nevertheless the markets then moved sideways with the exception of Asia and slipped into negative territory towards the end of January. The DAX declined -2.08% on a monthly basis, the broad Stoxx Europe 600 closed -0.80% lower and the US S&P 500 index was down -0.36%. In Asia, however, markets performed well. Hong Kong's Hang Seng Index rose 4.67%. Global equities as measured by the MSCI World recorded a moderate decline in height of -0.30% - all index figures in euro terms.

The market correction was mainly due to two factors:

  • Mutations of the Corona virus emerged and spread in the UK, Brazil and South Africa. The question of whether the vaccines developed so far would also be effective against the mutations unsettled market participants. In addition there was a shortage of vaccine particularly in the EU as deliveries from producers fell well short of the quantity ordered. Together with the extension of the lockdown measures in Germany and other countries this weighed on the market sentiment.
  • Towards the end of the month, large-scale purchases by small investors, arranged via social media and trading platforms, pushed up the prices of various stocks causing a turmoil of the markets. As these stocks were also the target of short selling by several hedge funds they were forced to cover their positions, what consequently catapulted the prices of these stocks even more. The U.S. Securities and Exchange Commission announced its intention to investigate this speculation.

Economic data of the euro zone were mixed. On one hand the German ifo business climate index slipped and the purchasing managers' indices for industry fell slightly - here the extended lockdown measures were visible. On the other hand the German economy developed better than expected increasing its industrial production, new orders and exports in November. On an annual basis German GDP contracted by -5.0% in 2020 which was lower than expected and also not as much as in 2009, the year of the financial crisis. For 2021 the German government reduced its growth forecast from 4.4% to 3.0% due to the extended lockdown.

In the USA the Democrats won two Senate seats, making it easier for the new US President Joe Biden, a Democrat, to have decisions passed by Congress. This raised hopes that the new U.S. administration could launch a new Corona aid package worth up to $1,900 billion. Economically, the USA performed positively with the exception of a small decline in retail sales and an unemployment rate that did not fall as expected but remained at 6.7%. The U.S. economy slipped -3.5% in 2020.

China handled the Corona pandemic better than other economies. Infection control was and is more important than data protection and the government's response to local Corona outbreaks was prompt and drastic. This was good for the Chinese economy that continues to show positive economic data. In 2020 China grew at a lower rate than previous years but was the only major economy to achieve positive growth at +2.3%.

 

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