EDITOR NOTE: According to this Financial Times article, the volatility caused by the Reddit swarm spilled over to international markets, affecting European and Asian stocks. It isn’t uncommon to see investors shed their positions during periods of high volatility, and that’s probably why we’re seeing major indexes pull back from their January highs. But there’s a much deeper systemic risk here. If social media-driven swarm trading continues to drive volatility to unprecedented levels, it can eventually cause hedge funds and brokerages to collapse, in turn collapsing the global financial system. When the equities market collapses, safe-haven assets are what investors seek out. In other words, hedging your assets by apportioning a percentage of your portfolio to non-CUSIP gold and silver is perhaps the most prudent thing you can do right now. And we’re not even addressing the longer-term risks of monetary policy, government spending, and inflation that’s just around the corner. We’re virtually at a juncture wherein your only choices are hedge or sink.
Shares on Wall Street followed European bourses lower on Friday, as an intensifying battle between retail traders and brokers over a handful of closely followed stocks drove up market measures of volatility.
The S&P 500 was 0.5 per cent lower in morning trade, leaving the blue-chip benchmark on track for its worst week since October. The tech-heavy Nasdaq Composite dipped 0.6 per cent.
The Cboe Vix — a measure of expected volatility known as Wall Street’s “fear gauge” — sat at 30, well above its long-term average of just below 20, as investors braced for another hectic session.
Robinhood, which was among the US brokers on Thursday to restrict trading in companies such as retailer GameStop, eased its curbs on trading for some of these securities on Friday. The California-based group has raised $1bn from investors and tapped credit lines to meet its capital and clearing requirements.
GameStop rose more than 60 per cent to above $300 a share in early trading.
“The retail horde are not going anywhere, and may have no day jobs,” said Michael Every, a global strategist at Rabobank, an investment bank. They “can pile into any stock or asset they choose, forcing brokers or regulators to shut down trading”.
Europe’s benchmark Stoxx 600 index fell 1.1 per cent by the afternoon, while London’s FTSE 100 benchmark slid 1.1 per cent and Frankfurt’s Xetra Dax slipped 0.6 per cent.
The uptick in volatility triggered by the market tussle added to worries among European investors about the economic damage being caused by the pandemic and shortages in some vaccines, whose rollout is deemed crucial to a recovery from the crisis.
“I think the volatility in the US will have some effect on European markets,” said Arnab Das, global market strategist at Invesco. “But the bigger picture here is still monetary policy, fiscal policy and the pandemic.” The Vstoxx index, the European gauge of market volatility, climbed to its highest level since early November.
Asia’s major stock markets closed down across the board as investor jitters grew. Japan’s Topix fell 1.6 per cent and South Korea’s Kospi dropped 3 per cent. Hong Kong’s Hang Seng swung from gains of about 1 per cent to end its session 0.9 per cent lower.
China’s CSI 300 index of Shanghai and Shenzhen-listed shares fell 0.5 per cent.
The Kuala Lumpur-traded shares of Top Glove, the world’s biggest maker of rubber gloves, jumped as much as 14 per cent on Friday after Reddit users called on retail investors to buy the stock. The “Bursabets” subreddit has signed up more than 6,000 members since it was set up on Thursday. Top Glove has been targeted by short-sellers who profit when a company’s share price falls.
Originally posted on Financial Times