Market sentiment is mixed on the back of rising Covid cases despite vaccinations and escalating tensions between China and the West.
The major US indices kicked off the week on a positive footing, but Asian indices didn’t follow up on the New York session gains. Most Asian indices traded in the red. Chinese indices led losses on the back of reviving diplomatic tensions after the US, the UK, Europe and Canada imposed sanctions on Beijing over human right abuses in Xinjiang. The latter will further weigh on fragile US-China trade relations and add fuel to the global trade war.
Rising global diplomatic tensions, combined with progress in new Covid cases should weigh on investor appetite, and improve demand in US treasury auctions this week. A cool down in US yields, in return, could limit the risk sell-off and encourage risk-resilient investors to return to technology stocks.
Federal Reserve (Fed) Head Jerome Powell and Treasury Secretary Janet Yellen are expected to sound cautiously optimistic and sufficiently dovish to try soothing investors’ nerve at today’s testimony before the House Financial Services Committee. ‘The recovery has progressed more quickly than generally expected and looks to be strengthening. But the recovery is far from complete, and the Fed will continue to provide the economy the support that it needs for as long as it takes’ likely resumes what will come out of today’s testimony.
Activity in European futures hints at a sluggish open on Tuesday. The FTSE will likely suffer a further sell-off in banks, energy and mining stocks.
In the EM, Turkish lira stabilized near $7.80/7.90 area after a heavy sell-off following the dismissal of its central bank head a few months after he took office. Turkey’s BIST 100 index was abated by a 10% plunge, as dovish central bank expectations don’t trigger a positive euphoria in Turkish stocks given that the lira’s strength is more important for the health of heavily foreign FX-indebted Turkish companies. But more worryingly, the 10-year yield on government debt securities soared by near 500 basis points, showing that investors quit Turkish debt in hurry regardless of heavy kneejerk losses. This is a serious cause for concern in terms of credibility and trust for the new governor, Mr Kavcioglu.
Moving forward, we shall see consolidation, stabilization in Turkish markets, as the new CB governor pledged to impose no capital controls, and no rate cuts in the immediate futre, but risks in Turkish stocks, bonds and the lira remain tilted to the downside. Short-term, day traders could still find interesting playing the post-trauma correction in Turkish stock index, and buy-the-dip aiming an exit near 1420/30 region. Meanwhile, long-term players will likely look for interesting top-selling opportunities as the Turkey’s central bank government crisis has just begun.
Gold remains under the pressure of rising yields and strong US dollar. Gold investors remain cautious, faced with a solid risk of seeing a further advance in US yields, that increase the opportunity cost of holding the non-interest-bearing gold. On the upside, an improved demand in US treasury auctions could encourage another positive move in gold, but the top-selling pressure will likely limit the upside potential near $1750/55 per oz range.
In company space, the now-famous GameStop is due to announce its fourth quarter earnings after the market close today. This is the first time the company will release earnings after the short-squeeze frenzy sent the price of a share to uncharted territories since the beginning of the year.
GameStop is undergoing important structural changes these days and the company’s aim to develop a solid e-commerce business is, in fact, a valuable step, as online sales is the future. The earnings expectation for GME is $1.42 per share, versus $-0.85 printed a quarter earlier. Revenue is expected to have more than doubled from $1.10 to 2.23 billion. If market expectations are ambitious, it’s because investors believe that the Cohen-boost may have made a difference and the improvement could already be read through numbers.
But there is a risk that GameStop results fall short of market expectations, as there are reports saying that GameStop’s holiday sales showed that same-store sales were down year-over-year in December and lagged behind positive industrywide results.
We can argue that it’s too early for the good results to show the underlying improvement in GameStop business and the fundamental restructuring the company is going through.
Prospect of future growth, and a good dose of speculation from day traders, are what keep the price of a share at the current levels. Therefore, GameStop longs should embrace the idea that we may not see fireworks at today’s numbers, if not, there could be a meaningful downside correction posterior to earnings announcement.