Australian shares are set to drop sharply, following heavy losses across US markets — though “meme stocks” like GameStop have defied the trend with another massive overnight surge.
ASX futures were down 89 points (-1.3pc) to 6,704, by 7:25am AEDT.
The Australian dollar slipped further from its three-year high, down (-1.2pc) to 78.76 US cents.
Overseas, technology-related stocks were heavily sold off and the Nasdaq Composite is on track for its worst day in four months.
The Nasdaq was down (-3.4pc) to 13,137 by 3:25pm (local time), while the S&P 500 fell (-2.4pc) to 3,831.
The Dow Jones index lost 546 points (-1.7pc) to 31,416.
Meanwhile, GameStop surged (+45pc) to $US134, after doubling in value yesterday, and its volatility triggered a series of trading halts on the New York Stock Exchange.
The volatile cryptocurrency bitcoin has risen (+1pc) to $US49,546.
Why is there a market sell-off?
Investors were spooked after the yield on America’s benchmark bonds (the 10-year Treasury) jumped to a one-year high of 1.53 per cent.
The return on US bonds (which are regarded as safe investments) is now higher than the dividend yield of Wall Street’s benchmark index, the S&P 500 (estimated to be 1.48 per cent).
It means shares (which are considered risky assets) have lost their advantage over the bond market.
This led to investors cashing out of their high-flying “growth” stocks due to concerns they are now starting to look quite overvalued.
“The concern is that we haven’t been in an environment of persistently rising inflation expectations so it creates this new dynamic for investors,” said Max Gokhman, head of asset allocation at Pacific Life Fund Advisors in Newport Beach, California.
Apple, Amazon, Microsoft, Alphabet (Google’s parent company), Facebook and Netflix were down between 1.9 and 2.9 per cent.
Tesla plunged (-5.5pc) after a media report that the electric-car maker told workers it would temporarily halt some production at its car assembly plant in California.
Optimism about more US stimulus (expected to be about $US1.9 trillion) and a quicker pace of vaccinations at the beginning of the month had positioned the the Dow Jones for its biggest monthly gain since November.
However, the lack of significant new developments around the stimulus package and the winding down of the earnings season have caused uncertainty in the market.
“In the beginning of February, the stimulus news was the driving force but now that it has been priced in, there is nothing on the distant horizon for equity investors to be excited about and there is a concern that upside is limited,” said Mike Zigmont, head of trading and research at Harvest Volatility Management.
GameStop surges again
GameStop shares hit $US160 at the open before being halted after several minutes of trading and fell to about $US129 before the second halt.
The rally lifted other “stonks” popular on sites such as Reddit’s WallStreetBets, including AMC Entertainment (+12.5pc) and headphone company Koss Corp (+61pc).
Analysts were puzzled by the new rally. Some ruled out an epic “short squeeze” like the one in January.
Last month, some hedge funds which bet against GameStop lost billions of dollars — as they were forced to cover their short positions when individual investors using Robinhood and other trading apps pushed the video game retailer’s shares to a record high ($US483).
“The power of the ‘three R’s’ [Robinhood, Retail, Reddit] are back in play,” said Neil Campling, head of technology research at Mirabaud Securities.
Ankit Gheedia, head of equity and derivative strategy, Europe for BNP Paribas, said: “Short interest, though still significant, is now starting out from a different base than last time when it was more than 100 per cent.”
Some said the rally may be partly fuelled by a fear of betting against GameStop.
‘Really stupid’ gambling mentality
The latest surge comes days after Reddit trader Keith Gill, who runs the YouTube channel Roaring Kitty, doubled down on GameStop and bought additional shares last week.
Mr Gill testified to Congress last week that he remains bullish on GameStop, with his words “I like the stock” gaining popularity, being quoted by hundreds of his online followers and featuring on financial-themed meme pages online.
Reddit discussion threads were buzzing again about GameStop on Thursday (local time), with members exhorting others to pile in as the rally gathers steam.
“Bought lots more #GME today, let’s keep fighting !!,” wrote Reddit user Fundssqueezzer.
GameStop shares skyrocketed by more than 1,600 per cent in January as retail investors, urged on by WallStreetBets, bought the stock as a way to punish hedge funds that had taken an outsized short bet against it.
The squeeze hurt Melvin Capital’s Gabriel Plotkin, whose firm was left needing a $US2.75 billion lifeline supplied by hedge fund Citadel LLC’s Kenneth Griffin and Point72 Asset Management’s Steven Cohen.
The risky trading strategies employed by some traders on Reddit have drawn the ire of investing legends such as Charlie Munger, long time business partner of Warren Buffett.
Online brokerage Robinhood said in a tweet that the NYSE action would impact all brokerages, but that it had not paused trading on the shares.