The FTSE 100 was set to fall more than 1% today after Wall Street’s Dow Jones Industrial Average suffered its biggest one-day plunge since October.
Despite, or perhaps because of, bizarre gains in so-called Reddit stocks - shares being pumped up by retail investors egging each other on through social media - the Dow fell 2% by the close last night.
Why “because of”?
A small number of stocks in which hedge funds hold big short positions are coming under such strong attack from the Reddit brigade that their share prices are surging outlandishly. That has triggered big paper losses for the hedge funds, who are having to sell other stocks to make up the shortfall in the margin accounts held with their brokers.
The stocks being targeted by the potty-mouthed Reddit brigade include GameStop - bricks and mortar video games retailer - and AMC Entertainment, owner of Odean cinemas. Given the global trends against such companies, you can see why the shorts were shorting.
You can also see how this can only end in a lot of retail investors getting badly burned as valuations eventually return to more realistic levels. Still, even Ponzi schemes (which these aren’t) make money for those first in.
Regulators are sure to have some form of clampdown on social media share ramping when the cards collapse (another headache for tech stocks), but for now, the effect on the wider markets is a sight to behold.
Watch: Mayhem on Wall Street after amateur investors take on billionaire hedge funds
The FTSE was being called down 71 points at 6500 by traders on IG Index. Japan fell 1% this morning, while Australia lost nearly 2% at one point.
In Europe, the Dax in Germany is set to fall 75 to 13545 and France’s CAC 35 to 5435, according to CMC Markets prices.
It wasn’t all Redditt stocks that were dragging down the Dow yesterday. Poor profit announcements from Boeing and others hit sentiment.
Meanwhile, US stocks have defied gravity lately, and investors have been ignoring the potential spike in Covid-19 cases heading America’s way as the Kent variant of the disease spreads. Experience in the UK, Ireland and Portugal suggests the US is in for a grim few weeks and potential extra lockdowns.
In the UK, news that schools will not be reopening until 8 March focused minds on that issue, while the battle between the EU and AstraZeneca raised concerns vaccines ordered months ago for Britain could end up being diverted to Europe.
The shift in the global mood towards more negativity was reflected by Federal Reserve head Jay Powell yesterday who appeared cautious on the economic recovery. He reminded markets of the looming dangers of new variants of Covid and signalled the Fed was not going to change its easy monetary policy any time soon.
Today sees US GDP numbers that will provide the evidence of that. The fourth quarter was a period in which US politicians argued over whether to push through a stimulus package to help those suffering the economic effects of Covid. That will have hit GDP as personal consumption faded.
Analysts are predicting Q3’s 33.4% surge to fizzle out to just 4.3%. Unlike in the UK, US GDP numbers are an estimate of what the annual rate would be, given the quarter’s progress.
City investors will be cheering London Stock Exchange chief David Schwimmer today as he came out fighting for the capital’s need for a major overhaul in share listing rules. He said the UK needed to adapt its strict curbs if it was to reverse the trend of fast-growing tech companies choosing New York or other exchanges.
The City is split over the issue, with corporate governance including many big investment funds saying London should retain its gold standard status and others pointing out that the FTSE is a nowadays replete with old tech mining, oil and banking stocks.
Schwimmer said the rules should be changed, albeit “in a thoughtful way”.
Former EU commissioner Jonathan Hill is reviewing the rules and is expected to report his findings next month.