US FED RESERVES JUDGEMENT WHILE RETAIL INVESTORS TAKE ON WALL ST

US FED RESERVES JUDGEMENT WHILE RETAIL INVESTORS TAKE ON WALL ST

This week we caught a slight glimpse of what life was like in the before times, when the most notable news we had to deal with was a couple of central bank statements. US Federal Reserve chairman, Jay Powell, gave a downbeat speech that sent a strong signal they intend to keep things loose for a while yet. The European Central Bank also got in on the act, saying that they’re not that bothered by the recent data showing France and Spain aren’t doing as badly as expected. In another clear signal to markets, they made the point of saying a rate cut was still possible in March.

Meanwhile, a scramble in the US saw retail investors use online messaging boards to ramp up the price of struggling retailer GameStop, putting a few hedge funds, that had bet against the company, in a tight spot. This is not that different to activity seen on trading floors the world over but, sadly, it will likely end in tears. The platforms used by retail investors are facing a squeeze of their own as they try to process increased trading volumes. A hedge fund losing millions means a poor quarter, but some smaller traders swept up in the excitement will find themselves wiped out.

US: ECONOMY PROVES RESILIENT IN THE FACE OF RISING COVID-19 CASES

The US has so far proved more robust to the coronavirus pandemic than other developed economies. Despite it having the largest number of confirmed Covid-19 cases and deaths, the US economy shrank by 3.5 per cent in 2020. This is compared to an estimated fall of 7 per cent for the Eurozone and 10 per cent drop for the UK. The last three months of the year saw its recovery continue with GDP increasing by 4 per cent on an annualised basis – although this is a big slowdown from the 33.4 per cent growth seen in Q3 2020.

The stronger then expected Q4 growth was a factor in the US Federal Reserve leaving interest rates unchanged at its meeting this week. It also left its asset purchase programme unchanged at $120bn a month. Increasing unemployment and the slowdown in growth led Fed chairman Jay Powell to warn future growth was dependent on the ability to control the Covid-19 outbreak.

UK: NOVEMBER’S LOCKDOWN PUSHES UNEMPLOYMENT TO 5 PER CENT

The UK’s unemployment rate hit 5 per cent for the three months to end November, an increase of 1.2 percentage points from November 2019. This means an estimated 418,000 more people are out of work than a year previously. But the number of job losses so far is remarkably low considering the UK has seen the biggest economic slowdown in history.

Two major factors that can help explain the comparatively low level of job losses are the government funded furlough scheme and a sharp increase in the number of people leaving the UK permanently. The government has extended the furlough scheme to the end of April, and it currently protects just over 4 million jobs. Meanwhile, analysis from the Economic Statistics Centre of Excellence puts the number of people leaving the UK permanently during 2020 as 1.3 million, with 700,000 estimated to have left London. If accurate, it would help explain why unemployment is still far below the 8 per cent seen after the financial crisis.

EQUITIES: TRAVEL STOCKS HIT BY NEW GOVERNMENT RESTRICTIONS

Airline and aerospace shares had another tough week as the government announced new restrictions for travel in and out of the UK and hinted that lockdown would continue well beyond the February half-term holidays. EasyJet and International Airlines Group saw their shares drop 10 per cent and 12 per cent respectively on Monday when the government first announced its intention to restrict international arrivals from high risk countries, following similar restrictions introduced by Germany, Belgium and Sweden.

Aerospace and engineering group Rolls Royce and Melrose also saw their share price fall sharply as the prospect of air travel resuming diminished further. Rolls Royce shares are down more than 20 per cent since the start of 2021. With hotel occupancy at its lowest level since May and figures from Visit Britain showing international visits were down 76 per cent in 2020 the hospitality and travel industries are pushing for a clear plan to lift restrictions amid warnings many businesses will not survive if a second successive summer season is cancelled.