Fed, Reddit, and US GDP prompt volatile day for European stocks
Volatility on Wall Street spread worldwide on Thursday, sparking an early sell-off on Europe that had largely abated by the end of the day.
European stock markets opened sharply lower after a sell-off in New York, prompted by a downbeat assessment of the economy from the US Federal Reserve and amid a highly unusual battle between retail investors and hedge funds in parts of the market. The Dow Jones (^DJI) closed down 2% on Wednesday, its biggest one-day fall since October, and the S&P 500 (^GSPC) sunk 2.5%.
Asian stocks sold-off in the wake of the slump and the damage spread to Europe. The FTSE 100 (^FTSE) was down 1.5% shortly after the open in London on Thursday morning, while the CAC 40 (^FCHI) fell 1% in Paris and the DAX (^GDAXI) was 1.7% weaker in Frankfurt.
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The Fed had warned that US’s economic growth was slowing and said there were “considerable risks” to the recovery.
Unusually, however, the Fed’s pronouncements were not the dominant story in the market.
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“Last night’s Federal Reserve rate decision was somewhat overshadowed by the big surges in the so-called Reddit stocks,” said Michael Hewson, chief market analyst at CMC Markets.
Amateur investors congregating on the Reddit forum WallStreetBets have been waging a war against hedge fund short sellers. The days-long battle has been fought in old school stocks such as retailer GameStop (GME) and cinema chain AMC (AMC), prompting huge volatility in their prices. GameStop surged 134% on Wednesday alone, while AMC gained 300%.
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“It’s the financial version of the storming of the US Capitol building,” said Marshall Gittler, head of investment research at BDSwiss. “Only in this case it’s not so easy to determine who are the good guys and who are the bad guys – neither group seems particularly admirable.”
The hedge fund “squeeze” prompted sophisticated investors to cash out “more profitable positions to fund the losses,” Hewson said. That could help explain the global nature of the sell-off, as hedge funds liquidated investments elsewhere in the world to make up for losses.
“The market turmoil is highlighting a number of areas within the market, that might prompt regulatory scrutiny in the future, namely the monitoring of retail trade chat forums and message boards, and how they drive markets,” Hewson said.
The US Securities and Exchange Committee issued a brief statement on Wednesday night saying it was “working with our fellow regulators to assess the situation and review the activities of regulated entities, financial intermediaries, and other market participants.”
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Despite the early weakness, European markets mostly recovered in afternoon trade. Sentiment was helped by better-than-expected US GDP numbers and a positive open on Wall Street, defying earlier weakness in the futures market.
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The FTSE closed down just 0.6%, while the CAC gained 0.9% and the DAX rose 0.3%.
The S&P 500 had rallied 1.8% by the time trade finished in Europe, while the Dow was up 1.9% and the Nasdaq had gained 1.2%.
The wild price swings of Reddit stocks showed no signs of abating. GameStop and AMC both slumped as much as 50% during the session.
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In earnings news, Apple (AAPL) beat analysts’ forecasts with record sales numbers after the closing bell on Wednesday, powered by iPhone 12 sales. The stock was down 2% on Thursday.
Facebook (FB) reported better-than-expected fourth quarter earnings but warned there was “significant uncertainty” in it advertising business. The stock dropped 3.5% in after-hours but was up 0.8% by mid-morning in New York.
Tesla (TSLA) missed forecasts on earnings per share. Shares fell 3%.
Overnight in Asia, Japan’s Nikkei (^N225) fell 1.5%, South Korea’s KOSPI (^KS11) fell 1.7%, and the Australian ASX 200 (^AXJO) dropped 1.9%. In China, the Shanghai Composite (000001.SS) fell 1.9%, the Shenzen Component (399001.SZ) lost 3.2%, and the Hong Kong Hang Seng (^HSI) shed 2.6%.
