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Australian stocks were primed to rebound from their biggest loss in four months following a recovery on Wall Street as trading bans alleviated short squeezes.
ASX futures rallied 69 points or 1.05 per cent, signalling an early reversal of much of yesterday’s 131-point bloodbath.
US stocks bounced overnight after trading platforms restricted trading in stocks like GameStop and AMC, easing concerns about hedge funds liquidating positions to cover losses in losing short positions.
A soft 24-hour cycle on commodity markets saw iron ore plunge more than 5 per cent and gold extend its biggest losing run in almost two years. Oil also declined. The Australian dollar rebounded.
Wall Street
Stocks recovered as benefit claims declined, most of the megacap tech giants rallied and trading houses clamped down on a trading frenzy that pitted an army of small retail traders against hedge funds.
The S&P 500 bounced 37 points or 0.98 per cent, recovering less than half of its heaviest loss in three months. On Wednesday night, the index dived 2.57 per cent amid panic that speculative buying signalled a market top.
The Dow Jones Industrial Average rebounded 300 points or 0.99 per cent. The Nasdaq Composite gained 67 points or 0.5 per cent.
Short-selling hedge funds regained the upper hand in their battle with chatroom retail traders after popular trading platforms Robinhood and Interactive Brokers restricted trading. The brokers announced clients could no longer open or add to existing positions in the likes of GameStop and AMC, only close them. GameStop, which had risen almost 1,750 per cent this year, collapsed 44.3 per cent. AMC lost 56.6 per cent.
“If it (GameStop) had kept going higher, that just means more hedge funds would have had margin calls. I think when it backed off a little bit, the market breathed a sigh of relief,” Thomas Hayes, managing member at Great Hill Capital, told Reuters.
While the decision to restrict trading was welcomed on Wall Street, some politicians cried foul. US Representative Alexandria Ocasio-Cortez called for an inquiry.
“This is unacceptable,” she said. “We now need to know more about @RobinhoodApp’s decision to block retail investors from purchasing stock while hedge funds are freely able to trade the stock as they see fit. As a member of the Financial Services Cmte, I’d support a hearing if necessary.”
Also helping market sentiment was a drop in benefit claims. First-time claims for unemployment benefits declined 67,000 last week to 847,000, the lowest tally in three weeks. Fourth-quarter GDP was broadly in line with expectations at 4 per cent.
Among companies reporting earnings, Apple dipped 3.5 per cent despite beating analysts’ expectations. Tesla dropped 3.3 per cent. Facebook advanced 0.2 per cent and American Airlines 9.3 per cent.
Australian outlook
A relief rally looms after yesterday’s harrowing plunge. At one point yesterday the S&P/ASX 200 had fallen 2.7 per cent and was on track for its biggest decline since early September. The index should recover around half that fall at today’s open, but remains on track to end the week firmly lower.
The party may be over for Reddit’s self-proclaimed retail “degenerates“, but the extraordinary sight of hedge funds caving in to retail traders will live long in the memory. The fallout will reverberate through Wall Street.
The ripple effect was seen here yesterday with strong buying interest in some of the market’s most shorted stocks. The likes of InvoCare, Tassal Group and Treasury Wine Estates will be on investors’ radars again today.
The financial sector led the US rally, rising 1.9 per cent. Materials also fared well, climbing 1.8 per cent, but a dive in the price of iron ore will weigh here on BHP, Rio Tinto and Fortescue Metals. All 11 US sectors rallied.
Today is the last day of the quarterly season and should bring a rush of last-minute reports. Origin Energy is one of the few heavyweights still to report, according to Morningstar.
The dollar rebounded 0.59 per cent to 76.93 US cents as a flight to the perceived safety of the US dollar abated.
Commodities
Iron ore plunged yesterday following reports earlier in the week of increasing inventories at Chinese steel mills. The spot price for ore landed in China slumped $9.35 or 5.6 per cent to US$156.20 a tonne. BHP’s US-listed stock edged up 0.25 per cent and its UK-listed stock 0.22 per cent. Rio Tinto shed 0.23 per cent in the US and 0.85 per cent in the UK.
Gold fell for a sixth session, its worst run since March 2019. Metal for February delivery settled $7 or 0.4 per cent lower at US$1,837.90 an ounce. Silver climbed 2.1 per cent following a reported attempt on Reddit to mount a short squeeze.
Oil drifted lower amid worries about Chinese demand under fresh Covid restrictions. Brent crude settled 28 cents or 0.5 per cent lower at US$55.53 a barrel.
