“With Brexit still very much a hot topic it continues to cause many fractions between people and their opinions,” said Sukhi Jutla, co-founder of UK-.
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Figure 1 shows the weekly closes of the market price for GameStop in the lower pane and the total number of outstanding shares held short as a percentage of total shares is shown in the upper pane. This data is available with a lag , so the last date in the table is for 4 February. Because the same share of stock can be borrowed and sold multiple times, there is no theoretical limit on short interest. This is why the chart could report that in the weeks prior to the price surge, short interest hit percent of total outstanding shares.
By comparison, even at the peak of market bearishness on Tesla, short interest never got significantly above 25 percent of total shares.
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Even the shorts in AMC, which was caught up in a squeeze simultaneously with GameStop, did not get much above 30 percent of the float. Indeed, StarMine had rated GameStop as the most vulnerable to a short squeeze of any stock in the market. It is easy to see how total shorts exceeding the value of the market created a massive price response as these positions were reversed. It is unlikely that short selling will be banned because the existence of shorts can actually be a source of stability.
In normal market conditions, shorts are a source of support as they buy back their position on market downturns and can also provide resistance to excessive market euphoria. But the possibility that investors will now seek out other companies with aggressive short exposure to manufacture a GameStop-like squeeze creates pressure to introduce some type of restrictions. For example, there may be a case for limiting total outstanding shorts, e. In the meantime, investors considering establishing shorts — especially for thinly traded companies like GameStop — would be well served to monitor the StarMine short estimates reported in Eikon to avoid being on the wrong side of the next squeeze.
Although Bitcoin is now more than twice the prior peak, there seems to be relatively little focus or concern on Bitcoin overvaluation. Part of this may be the benefit of the existence of short-sellers discussed above. In , there was no practical way to sell Bitcoin short, creating the possibility of a one-sided market where bears were side-lined and which abetted the emergence of bubble conditions.
It is probably not a coincidence that, as shown in Figure 2, a peak emerged shortly after a futures contract started trading, creating a convenient vehicle to sell short. With an established vehicle for shorting, there is less concern that the bears are being kept out of the market.
Nissan to source more UK batteries as part of Brexit deal ‘opportunity’
One similarity of the two rallies are rumours that illegitimate issuance of Tether, another crypto-currency that is purportedly tied to the U. To date, the claims remain unsubstantiated. However, if it proves true, this could create a major setback for the Bitcoin rally.
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An important difference in the two Bitcoin rallies is also shown in Figure 2. Gold remained range- bound during the rally, but is now the bellwether having gone into a major rally early last year.
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The inflation expectations embedded in the 10Y Tips market collapsed in the early stages of the market shut-down but reacted to the growth in money supply to rise to the highest level of expected inflation in three years. Both the rally in Bitcoin and gold are direct reactions to the rise in inflationary expectations. The near-zero opportunity cost of holding cash is also supportive, so we would expect the gains to be maintained while the Fed remains in this expansive monetary state. That said, an extension of the Bitcoin rally appears to reflect the rise in inflation expectations and the price of gold, so a further extension above this level would start looking like a speculative bubble.
Whereas there was unanticipated volatility in the Bitcoin and GameStop markets, UK markets have been surprisingly stable following Brexit. There have clearly been delays and disruptions to flows of goods across the border, but the feared severe shortages of key goods and industrial inputs have, so far, not emerged.
It is too early in the year to get a clear fix on the performance of the real economy but, as shown in Figure 4, retail sales, one of the few January releases available, is supportive. Both are now back at the pre-COVID pace of growth, so there does not appear to be significant negative Brexit fallout on consumer sentiment.
The UK equity markets also seem to be taking the departure from the European Market in their stride. The relative value of the two markets has hardly budged since the end of the year. This is also true for the financial industry, which is key because the London banks are a sector that is particularly vulnerable to business disruptions as EUR business transfers to the Continent.
Currency markets are showing a lack of concern on the post-Brexit UK economy, which is important as cross-border trade and capital flows are the sector that is most exposed to Brexit related disruptions.