Wall Street Close: Major bourses subdued ahead of FOMC, GME short squeeze continues

• Major US bourses saw broadly flat trading conditions as markets look ahead to Wednesday’s FOMC meeting.
• The retail army vs Wall Street GameStop short squeeze continues.

The battle between the Reddit retail army and hedge fund short sellers stole the show again on Tuesday, with GameStop (GME) again at the epicentre. By battle, it would probably be better to call it a rout; GME shares finished the day 92.61% higher, the stock pumped by billionaire Chamath Palihapitiya's announcement that he had bought call options and famous crypto investor Cameron Winklevoss' announced that he was considering going long. Further upside has been seen in aftermarket trade after Tesla CEO Elon Musk tweaked “Gamestonk” and a link to the popular retail trader subreddit wallstreetbets; GameStop is up more than 30% in aftermarket trade.

The speculative mania being seen in GameStop and other small-cap, highly shorted stocks might be good entertainment for outside observers, but it is ringing alarm bells in the minds of some equity investors; when these small-cap stocks behave in a way that is so devoid of fundamental reality, it raises the question as to how much of the rest of Wall Street has been turned into a casino. With major US equity bourses currently sat right at all-time high levels, seasoned investors on the look-out for signs of a market bubble (which speculative mania such as what is happening in GameStop certainly is) may be inclined to take profit.

But looking beyond the headline-grabbing moves in tiny cap stocks like GameStop, it was a broadly subdued trading session for the major US indices; the S&P 500 closed 0.13% lower, the Nasdaq 100 flat and the Dow Jones 0.07% lower. All three indices spent most of US trading hours going sideways within thin ranges, with the interesting price action having come prior to the opening bell.

For reference, US equity index futures saw downside during the Asia Pacific session (market commentators noted concerns regarding US fiscal stimulus delay/the growing likelihood that the Biden administration might be unable to pass its proposed $1.9T stimulus plan in its entirety) but pared these losses prior to the US open (market commentators attributed the recovery in sentiment on positive vaccine news).

On which note, in terms of the vaccine latest, Moderna and Pfizer announced that they are looking into Covid-19 booster shots (another shot to come a few months to a year after the initial two shots) that would specifically be targeted at maintaining/building immunity to variants of the virus such as that discovered in South Africa a few weeks ago. Meanwhile, the CFO of Johnson & Johnson (J&J) said earlier in the day that they expect to release Covid-19 vaccine trial data next week and that the company is very optimistic that they will be releasing a very robust data set. J&J’s vaccine is being touted as a “game-changer” in the vaccination race as it would only require one shot to acquire full immunity.

Stock market indecision is not unusual ahead of an FOMC meeting. At 19:00GMT on Wednesday, the FOMC releases the result of its latest monetary policy decision; the FOMC release its latest monetary policy decision on Wednesday. The bank is likely to reiterate its ultra-dovish stance on policy and Powell is likely to continue to push back against the notion of any imminent tapering of the Fed’s asset purchase programme as he did when speaking earlier in the month.

Microsoft earnings

After the closing bell, Microsoft posted a strong Q4 earnings report; EPS came in at $2.03, above expectations for $1.64 and revenue for the quarter came in at $43.1B, above expectations for $40.18B. impressively, Server Products and Cloud services revenue rose 26% on the quarter, driven by a 50%in Azure revenue. Looking at the earnings breakdown, the Productivity and Business Processes, Intelligent Cloud and More Personal Computing segments all posted higher than expected revenue on the quarter. Microsoft has surged about 6% in after-hours trading.