Volatility has returned to markets this week, indeed on Wednesday the VIX volatility index saw its biggest rise since 2008, outdoing even the most volatile days last February and March as epidemic became pandemic, or the volatility seen in the autumn of 2015 in the aftermath of the Chinese currency devaluation.

The excitement has been so far mainly confined to the small-cap constituents and particularly in the US. At its epicentre has been a troubled but otherwise unremarkable small American retailer of second-hand computer games, Gamestop, which, if it was virtually unknown in December, is now a world-wide financial phenomenon. In scenes reminiscent of the Chinese retail bubble in 2015 and the various Bitcoin frenzies of the past few years, US retail investors egged on by investment websites (what in the old days would have been penny share tip-sheets) have been hard at work speculating on various small-cap names, including Gamestop, in some cases pushing up share prices by hundreds of percent in less than a month.

But there is a twist: this time the action centres around retail investors betting against hedge funds who are in turn betting against companies by shorting their shares. Whatever the motive of the eggers-on (profit? Subversion? Who knows) the resulting febrility has created ripples against a backdrop of many equity indices which despite the pandemic were recently nudging all-time highs, where capital flows in and out of asset classes and geographies have been extreme and in which the appetite to satisfy both equity and fixed income issuance of new capital has been almost insatiable.

Meanwhile, the Federal Reserve met on Wednesday for its regular policy meeting. Chairman Powell maintained loose monetary policy with no changes, completely as expected. The tone of the statement was subdued, indicating that while the vaccines provide the key to unlocking recovery beyond Covid, the roll-out is slow and is delaying the rate at which vulnerable sectors, particularly travel, hospitality and retail, can re-open and pick themselves up. Having last year shifted the inflation target from 2% nominal to 2% average, and giving an official nod to near-term volatility in prices but still being sceptical of longer-term structural inflation, his main priority is creating an environment to return to full employment with the immediate target of getting unemployment back below 5%. He reiterated his support for Biden’s programme of fiscal support while simultaneously implying that those among his Federal Reserve colleagues who see enduring excess inflationary pressures from the fiscal surge are chasing ghosts where none exists.

In Europe, the EU’s embarrassing and unnecessary public carpeting of the CEO of AstraZeneca reveals all the shortcomings of the EU as a protectionist bloc sinking under its own bureaucracy. That major global pharma companies such as AstraZeneca and Pfizer, working with academics, have achieved miracles of science and medicine in producing efficacious vaccines against Covid in under 10 months when normally the lead-time would be measured in years is apparently irrelevant. The EU has placed a contract for supplies (three months after the UK, but let that pass), it wants it honoured and it wants it NOW and if that means the UK contract being disrupted, so be it. The fact that the Oxford/ AstraZeneca vaccine has not even been licensed by the EU medical safety authorities is beside the point.

As European populations become restless about the imposition of further restrictions (the Netherlands, whose government has just resigned, has had to impose a national curfew to contain anti-lockdown riots this week; France too has imposed a curfew, while Belgium, Portugal and Germany have either tightened or extended restrictions) and the EU’s vaccination programme significantly lags other developed countries, the only response in Brussels to its own shortcomings is to lash out at anyone else it can find: step forward AstraZeneca. In a similar vein, not a single euro cent of the €750bn EU Covid-recovery programme (hailed as the EU’s ‘New Dawn’ after 5 days of fractious argument last July) has yet been disbursed; who’s fault could that be?

On the geopolitical front, it may have come as a surprise that Boris was the first western leader to be called by President Biden, especially given their previous mutual antipathies. But this is realpolitik at work. Boris has firmly distanced himself from Trump and has made the appropriate diplomatic cooing noises towards the new administration. From Biden’s point of view, while he might not like Brexit, the all-important Irish border question is resolved entirely to America’s satisfaction; but while trying to build a unified western position to contain China (supported by the UK), and having ‘reached out’ to Europe with the intention of rebuilding bridges, he has just been very publicly cold-shouldered by the EU in its alignment with China in signing its new investment agreement. In that context, the Biden/Boris rapprochement is rather less surprising.

If China has been adroit in splitting not only western alliances but also disintermediating US influence in Asia with the catchily entitled Regional Economic Comprehensive Partnership driving Japan, South Korea and Indonesia more in to Beijing’s orbit, President Xi’s appearance at ‘Virtual Davos’ this week exactly four years after his last (indeed China’s first ever) was no coincidence, exquisitely timed a week after a new US president takes office to show who is really taking global leadership. Xi’s brazenness was extraordinary. China is a paragon of virtue, an unequivocal upholder of ‘international law, opposed to the law of the jungle’; it won’t ‘bend the laws as it sees fit’; it wants to ‘build a beautiful world’. If that is the official version of the truth there are many who might have very different opinions, foremost among them Joe Biden. The US/China cold war is nowhere near thawing.

The Jupiter Merlin Portfolios are long-term investments; they are certainly not immune from market volatility, but they are expected to be less volatile over time, commensurate with the risk tolerance of each. With liquidity uppermost in our mind, we seek to invest in funds run by experienced managers with a blend of styles but who share our core philosophy of trying to capture good performance in buoyant markets while minimising as far as possible the risk of losses in more challenging conditions.
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