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Australian stocks look set to open firmly lower after disappointing earnings and short squeezes launched by retail traders fuelled heavy selling on Wall Street.

ASX futures dropped 73 points or 1.1 per cent as US stocks slumped more than 2 per cent.

A “risk-off” session saw the US dollar surge, pushing the Australian unit below 77 US cents. Gold fell for a fifth day. Oil was mixed. Iron ore inched higher.

Wall Street

US stocks tumbled amid reports of forced selling by hedge funds to cover losing short positions in Reddit chatroom favourites GameStop and AMC. Both stocks more than doubled overnight.

The S&P 500 dived 99 points or 2.57 per cent, turning negative for the year. The Dow Jones Industrial Average shed 635 points or 2.05 per cent after Boeing reported a record US$11.9 billion annual loss. The fall was the blue-chip average’s heaviest since October. The Nasdaq Composite gave up 355 points or 2.61 per cent.

Wall Street’s volatility index, the “VIX”, spiked to a three-week high amid concerns about speculative trading. Retail traders have wrong-footed several Wall Street hedge funds by launching raids on heavily-shorted companies, driving up the price and forcing funds to “cover” their positions by buying back stock at a loss.

“As weird as that may sound, what is partially responsible for what’s going on today in the market is that there’s a lot of selling going on to raise cash to cover some of these big shorts that are just getting pummelled,” Sean O’Hara, president of Pacer ETF Distributors, told Reuters.

The new phenomenon of retail traders banding together to hunt hedge funds is a reversal of the traditional food chain on financial markets and has sent shivers through Wall Street. Previously-unloved video game retailer GameStop surged 134.8 per cent overnight. Cinema operator AMC soared 301.2 per cent. FundStrat’s Tom Lee said the extreme gains were “creating substantial margin calls for funds short these positions”. The turmoil had pushed active managers into “risk-off mode”.

On the wider market, Boeing slumped 4.1 per cent after surprising the market with a much larger loss than expected. Microsoft climbed 0.3 per cent in what investors hoped was a positive sign ahead of after-market earnings this morning from Apple, Facebook and Tesla.

The first Federal Reserve meeting of the year had minimal impact as the central bank kept its key rate near zero and made no major policy changes. The bank repeat its commitment to support the economy until it rebounds.

Australian outlook

The S&P/ASX 200 looks primed to open deep in its old trading range, denting hopes it had built a floor following last week’s breakout. The index slipped 44 points or 0.65 per cent yesterday and looks likely to open near its 20-day moving average this morning.

It is not often that a Fed meeting is a footnote to other US market events. While it is hard to feel any sympathy for Wall Street hedge funds, the knock-on effects of forced selling were significant. All 11 US sectors declined. Just four out of thirty Dow component companies finished higher. The major indices finished near their lows amid speculation this week’s behaviour is indicative of an over-bought market ripe for a pullback.

The miners that led yesterday’s ASX retreat have soft leads again. The US materials sector fell 3 per cent as a jump in the US dollar signalled potential price weakness ahead in dollar-denominated commodities.

The financial sector was not far behind, falling 2.9 per cent. Energy was the best of a rotten bunch with a decline of almost 1.4 per cent. The tech-heavy communication services and consumer discretionary sectors sank 3.8 and 3.1 per cent, respectively.

Back home, the quarterly reporting season is nearing its end. According to Morningstar, today brings updates today from Fortescue Metals, Newcrest, ResMed and IGO.  

The dollar fell victim to a “flight to safety” in the US dollar. The Aussie tumbled 1.22 per cent to 76.56 US cents.

Commodities

In overnight trade, BHP and Rio Tinto broadly mirrored yesterday’s Australian losses despite an up-tick in iron ore.  The spot price for ore landed in China bounced 90 cents or 0.5 per cent to US$165.55 a tonne. BHP’s US-listed stock dropped 3.69 per cent and its UK-listed stock 2.4 per cent. Rio Tinto shed 2.93 per cent in the US and 2.96 per cent in the UK.

Strength in the US dollar condemned gold to a fifth straight decline. Falls were contained by a drop in US bond yields. Metal for February delivery settled $6 or 0.3 per cent lower at US$1,844.90 an ounce. The NYSE Arca Gold Bugs Index fell 4.4 per cent.

Oil continued to mark time, finishing mixed for a second straight session. Brent crude settled 10 cents or 0.2 per cent weaker at US$55.81 a barrel. The US benchmark edged up 24 cents or 0.5 per cent to US$52.85.

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