January 2021 Market Wrap

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Global equities slumped in the last week of Jan, amid high market volatility induced by unusual retail-trading volume. Short-squeeze conditions appeared in certain target stocks, driven by retail investors who used online forums to collectively push prices of stocks up. This forced several institutional investors with short positions to buy back their borrowed shares at higher prices, leading to heavy losses on their bearish positions. Many hedge funds scrambled to cash out other liquid positions to cover their open exposure, triggering a wide sell-off across stocks and led to online brokerages imposing restrictions on trading. U.S. dollars and treasuries rallied last week, bolstered by investors’ flight to safety.

Fed Reserve reinforced in Jan’s meeting that the economic outlook remains uncertain, and it will be some time before the central bank begins to taper its asset purchases. This week, analysts are closely watching central banks movements, where the Bank of England is largely expected to hold back from further stimulus or to embark on negative interest rates. The ECB is also due to make a statement on Wednesday.

Turning to Asia, equity flows from mainland China to Hong Kong hit a record high last month, as Hong Kong offered arbitrage opportunities for Chinese dual-listed shares via the Stock Connect program, lifting the Hang Seng Index to a 20-month high.

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