Weekly market update : Volatility could reappear

01/18/2021 | 08:39am
January 18
Weekly market update
intro Awaiting the opening of the earnings season, financial markets generally took a breather last week, affected by US political tensions and fears about the rapid spread of the British variant of the coronavirus. The announcement by Joe Biden of a $1.9 trillion recovery plan, widely anticipated, has not generated any real enthusiasm.


Over the past week, Asian indices have done very well. The Nikkei reaped 1.3%, evolving on 30 year highs, the Hang Seng gained 2.7% while the Shanghai Composite crumbled by 0.1%.

In Europe, on the other hand, indices have lost ground due to some profit-taking. The CAC40 recorded a weekly loss of 2%, the Dax fell 2.2% and the Footsie by 2.3%. As for the peripheral countries of the euro zone, Portugal posted the largest decline (-4.1%), Spain lost 2.4% and Italy 1.8%.

In the United States, the Dow Jones fell by about 1.2% over the week, the S&P500 lost 1.7% and the Nasdaq100 2.5%.


Oil prices have stabilized last week but still rose by just under 10% since January 1. Investors have taken note of OPEC's forecast, which, as always, is very cautious about the impact of the pandemic on the recovery in demand for crude oil this year. The cartel still expects a rebound of 5.9 million barrels per day in 2021. Brent is trading at USD 54.7 per barrel, compared with USD 52.1 for the US benchmark.

Gold and silver remain tightly controlled, with prices moving flat over the last five sessions. The World Gold Council this week unveiled its forecast for 2021 and invites investors to keep a close watch on inflationary pressures that could support the price of the gold metal. Gold thus stabilizes at around USD 1850, while silver is trading at USD 25.4.

Base metals finished the week in mixed order. While zinc and copper mark a pause (at 2716 and 8000 dollars respectively), nickel and lead gain ground (at 17900 and 2040 dollars respectively).
Equities markets

Focus on one of the trends of the year 2020: e-learning. Chegg is a platform launched by students in 2005 to find an alternative to the often expensive purchase of university books. The company, listed on the stock exchange since 2013, offers an online book rental service as well as a tutoring service by monthly subscription.

The year 2020 has strongly boosted the activity of this Californian company. Indeed, health restrictions have pushed millions of students around the world to study online. Chegg saw its number of subscribers increase by 29% to 3.9 million, mainly in the United States. Revenues are estimated to increase by more than 50% over 2019 and EBITDA by more than 60%. Moreover, this is not expected to be a short-lived phenomenon: analysts forecast sales growth of 25% for the current year and the following year.

Indeed, the situation of students, particularly in the United States, is changing. They are getting older and older, with an average age of 25, and more than 40% of them work 30 hours a week, according to CEO Dan Rosenweig. The flexibility of online courses can revolutionize learning over the long term and Chegg is positioned on this new trend.

The Santa Clara-based company's stock has risen 250% over the year 2020 to $100.

Strong progression of the Chegg share

Bond market

There is a real dichotomy between the yields on both sides of the Atlantic. Indeed, the US Tbond is again climbing several basis points to reach 1.10% (see graph). The upward trend is consistent with the massive economic stimulus and aid package, which could amount to $2 trillion, to combat the continuing economic impact of the pandemic.

In contrast, European sovereign borrowing remains strong, with yields firmly anchored in low areas. The German bund produces -0.55% and the French OAT yields -0.32%. The same is true further south on the continent, where the Iberian debt manager should soon see a negative rate on the 10-year benchmark. Switzerland, for its part, maintains very advantageous borrowing conditions with a return on its major security at -0.55%.

U.S. 10-year rate increase

Forex market

The Italian Prime Minister, Conte, lost his majority in parliament. The fall of the transalpine government, at a time when the country is going through an unprecedented crisis, is the result of deep disagreements over the 209 billion euro stimulus package. On the news, the EUR/USD stalled, hitting a one-month low of USD 1.21.

The British currency, meanwhile, recovered after the governor of the Bank of England ruled out the possibility of introducing negative interest rates for the time being. In the currency market, the pound sterling's parities were mostly up over the week, such as the GBP/JPY at 141.7 and the cable at USD 1.365. The institute had to evaluate the impact of Brexit and the latest containment measures on the economy before adjusting its monetary policy.

In Asia, the Bank of Japan may revise downwards its growth forecasts for FY 2020/2021, which ends in March, following the negative impact of Covid on the Japanese economy. This outlook should therefore confirm the BOJ's ultra-accommodating monetary policy. In addition, the promise of U.S. fiscal stimulus is dampening demand for safe haven assets. Pressure has thus increased on the Japanese currency, which has slid against all the pairs in the Group of 10. The new deal prompted Forex traders to cut their USD/JPY shorts, which recovered 200 basis points to JPY 103.90.
Southern Hemisphere currencies are also taking advantage of the Risk On environment to stretch their bullish rally. The kiwi is trading at USD 0.73, a 3-year high, while the Aussie is trading back at USD 0.78.

Rebound in EUR/JPY

Economic data

In China, figures all exceeded expectations, as did the CPI and PPI indices, at 0.2% and -0.4% respectively, or the trade balance (517B vs. 466B expected).

In the euro zone, few statistics were on the agenda. Industrial production rose by 2.5% (0.2% expected and 2.3% last month) and the trade balance by 25.1B (against 22.3B expected).

In the United States, employment data was disappointing, with weekly unemployment registrations up 965K (784K previously).

Other macroeconomic data also missed the consensus, with the PPI index coming out at 0.3% (0.4% expected), retail sales down 0.7% when they were expected to be flat, and the Empire State Manufacturing Index falling to 3.5 (consensus 5.7).

Only industrial production exceeded expectations (1.6% vs. 0.5% expected).
Volatility could reappear

The first trading month of the year 2021 ends with the three witches marking the clearing of option contracts. To date, in spite of the strong health uncertainties coupled with vaccine logistics problems, no consolidation movement has yet taken place. Investor morale remains high, and as a result, investors are more likely to favor the future over the present.

However, growth prospects for the current year seem to be eroding as the new containment phases progress. Entering the earnings season should bring some volatility, which has ebbed in recent weeks. This resurgence of stress could return, especially if micro-economic expectations reveal some disillusionment about a dynamic recovery.
Patrick Rejaunier
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