Short covering is the rebound fuel
Based on Saxo’s client behaviour from last week and this week we can see that a lot of the fuel during the rebound has been around short covering. Clients were accelerating their shorting of speculative growth stocks into the selloff on Thursday last week. But in several bubble stocks and other speculative growth stocks half of short positions were covered during Friday’s bounce and the short covering continued on Monday. This flow is ebbing now and thus the rebound is likely to lose speed.
While the VIX Index and the VIX forward curve have both changed in favour of less nervous equity markets and more risk-on, the underlying risks to equities persists with financial conditions expected to be tightened significantly over the coming quarter to cool off inflationary pressures. The fiscal impulse in the developed world is also declining putting extra downward pressure on growth. Our view is unchanged and which is that investors should continue to rotate portfolios into inflation hedges such as commodities, logistics, mega caps, semiconductors, cyber security, and India to reduce sensitivity to US interest rates.
PayPal shares down 17% in pre-market
The biggest negative surprise amid the earnings optimism was PayPal Q4 earnings showing lower volume and the Q1 guidance was a massive negative surprise with EPS of $0.87 vs est. $1.17 and the guidance on EPS for FY22 was $4.60-4.75 vs est. $5.23 spooking the market. At the same time the company abandoned its 2025 target on 750mn accounts. Part of the slowdown for PayPal is that the former parent company EBay is moving more and more payments away from PayPal, but people returning to physical stores is also reducing growth in e-commerce payments. The bulls on the stock will point to a lot of new account services such as high yielding accounts, pay-now-pay-later functionality, trading in cryptocurrencies etc., but for now PayPal has lost some confidence from investors sending the shares down 17% in pre-market trading. In Europe, the fast growing payments company Adyen has recently been hit by the slowing growth of PayPal which has made some investors questioning whether Adyen is also hit, but judging from investors’ reaction today to PayPal’s result suggest confidence in Adyen’s growth numbers is coming back.