US stocks set for third daily fall after biggest drop since October, as global markets second-guess recent rally

Pedestrians walk past the New York Stock Exchange in New York
Wall Street had a tough day on Wednesday, with stocks tumbling and Redditors piling on the pressure

US stocks were set to fall for the third day in a row at the opening bell on Thursday after the biggest drop since October, with investors around the world questioning the recent stellar rally.

S&P 500 futures were down 0.76% on Thursday after the index tumbled 2.57% on Wednesday. Nasdaq and Dow Jones futures were off by 1.16% and 0.53% respectively. The dollar rose along with bonds, as investors moved into safer assets.

Stock markets were a sea of red around the world. China’s CSI 300 dropped 2.73% overnight as tighter credit conditions and worries about coronavirus in Asia knocked market confidence. Japan’s Nikkei 225 fell 1.53%, while Hong Kong’s Hang Seng finished 2.55% lower.

European shares fell sharply at the open, with the regional Stoxx 600 off by 1.53%, driven lower by fears over shortages of coronavirus vaccines. The UK’s FTSE 100 dropped 1.32%.

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The drops in Asia and Europe came after Wall Street suffered heavy losses on Wednesday, with the Dow Jones sliding 2.05% and the Nasdaq shedding 2.61%. These were the biggest one-day drops since October.

The VIX index, which measures stock-market volatility, surged around 50% from roughly 23 on Wednesday to more than 35 on Thursday morning in a sign of investor nervousness.

Despite the large falls, the financial world’s attention was on the battle between hedge funds and day traders from the Reddit forum r/wallstreetbets.

Day traders helped drive up video-game store GameStop’s shares 138.84% on Wednesday, as they attempted to squeeze investors such as hedge fund Melvin Capital who have been shorting the stock. The stock has risen more than 1,000% this year so far.

“Yesterday saw one of the biggest sell-offs in markets for some months, unless you were a r/WallStreetBets stock-buyer, where you potentially saw a lifetime’s worth of positive performance in a day,” said Jim Reid of Deutsche Bank in a note.

Charalambos Pissouros, senior market analyst at JFD Group, suggested the falls on Wall Street may have been due to “hedge funds with short positions in GameStop and other ‘meme stocks’ closing long positions in other stocks to cover their losses”.

But investors in bigger names had plenty of other things to worry about, including concerns over coronavirus vaccine shortages.

President Joe Biden earlier this week said the US was working to secure more doses in response to complaints from states. Meanwhile, the UK and EU have been locked in a spat this week over the supply of the AstraZeneca/Oxford University vaccine.

The Federal Reserve on Wednesday left interest rates and bond-buying unchanged. The central bank noted “the pace of the recovery in economic activity and employment has moderated in recent months”.

Bond prices rose on Thursday morning, lifted by investors buying safe-haven assets. The yield on the 10-year US Treasury, which moved inversely to the price, fell 1.1 basis points to 1.003%. The dollar index rose 0.1% to 90.73 thanks to the same dynamics.

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Mike Wilson, chief US equity strategist at Morgan Stanley told CNBC yesterday that he was still bullish about stocks in 2021 but said a “good consolidation is what we need”.

“There’s been leverage put on top of the liquidity that’s been provided by the Fed and other central banks, and some of that leverage needs to come out.”

Apple, Facebook and Tesla’s shares all dropped in pre-market trading despite reporting upbeat quarterly earnings. Investors reacted badly to slightly weaker outlooks from Apple and Facebook, while Tesla missed analysts’ expectations despite posting a profit.

Bitcoin steadied on Thursday after dropping to below $30,000 the previous day. It was last up 0.16% at $31,368.

Oil prices fell after a strong run, in a sign investors were reducing their expectations of demand. Brent crude was off by 0.22% to $55.41 a barrel, while WTI crude fell 0.3% to $52.69 a barrel.