01 February 2021

US Stocks Plummet Amid High Speculative Trading

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News shaping
the markets today

     

What’s happening: US stocks ended sharply lower on the last trading day of January, with the Dow Jones index and S&P 500 recording their worst month since October.

What happened: Last week was chaotic for Wall Street. It not only saw the S&P 500 and Nasdaq 100 reach record highs, but also included the worst day for the Dow Jones index and S&P 500 in the last three months.

US stocks remained highly volatile through the week due to heightened speculative trading by retail traders.

Why it matters: Last week, Wall Street witnessed the highest trading volumes in years. Investors were concerned about the massive spike and significant short squeeze in certain stocks, triggered by conversations among retail traders on Reddit.

GameStop came out of nowhere and grabbed the limelight. Although the company has been struggling, falling significantly behind the technological advancements of offerings by competitors, retail traders decided to buy its shares after messages on Reddit around the stock being shorted by institutional investors.

GameStop’s shares gained a whopping 400% last week and added more than 1,600% last month. Traders also focused on AMC Entertainment, sending its shares higher by more than 500% in January.

Trading volumes in the US stock markets climbed past 23.7 billion shares on Wednesday, exceeding the previous record set amid the financial crisis in 2008.

Various lawmakers have called for an investigation into the market frenzy through last week, and the SEC (Securities and Exchange Commission) is expected to step in.

“There’s way too much leverage in the system, and we’re starting to see signs that this excess leverage is going to be unwound in a way that will create headwinds for the stock market and other risk assets for more than just a few days,” said Matt Maley, chief market strategist at Miller Tabak.

Meanwhile, Johnson & Johnson released late-stage trial results from its covid-19 vaccine, showing an efficacy rate of 66%, much lower than that achieved by Pfizer and Moderna, while also being less effective on variants of the virus. On the other hand, Johnson & Johnson’s candidate is a single dose vaccine and provided protection against hospitalisations and deaths.

The Dow Jones index tumbled 620.74 points to close at 29,982.62 on Friday, settling below the 30,000 mark for the first time since December 14. The S&P 500 declined 1.9% to 3,714.24, with most sectors closing in the red. The Nasdaq 100 fell 2.09% to settle at 12,925.38 with shares of Apple and other big tech names declining on Friday.

All three major indices dipped more than 3% last week, notching their worst week since October. The Dow Jones index and S&P 500 lost 2% in January, while the Nasdaq 100 manged to end the month with 0.3% gains.

What to watch: Markets will keep an eye on volatility in the US stock market. As the stocks in focus are not constituents of the major stock indices, their influence remains limited.

“While we believe there is more pain to come we remain optimistic that it is likely to remain localized,” said Maneesh Deshpande of Barclays. “Market exposure of long-short hedge funds is relatively small, indicating little impact to the overall market due to deleveraging.”

Investors await a basket of economic reports from the US, including IHS Markit manufacturing PMI, ISM manufacturing PMI and construction spending. The IHS Markit manufacturing PMI is expected to rise to 59.1 in January, from 58.3 in December, while the ISM manufacturing PMI is projected to decline to 60 in January, from a previous reading of 60.7. Analysts expect construction spending to rise by 0.9% in December.

The Markets Today

     

The Canadian dollar will be in focus today ahead of manufacturing data from the country.

Context: The Canadian dollar traded higher versus the US dollar on Friday on news of faster-than-projected growth in Canada’s economy.

Details: Canada’s economy expanded by 0.7% in November, following 0.4% growth in the earlier month, according to data from Statistics Canada. This was the seventh straight month of expansion and surpassed market expectations of 0.4% GDP growth.

The country also released some other economic reports on Friday, with producer prices rising 1.5% in December, from a 0.5% decline in November. Canada’s government budget deficit increased to C$15.40 billion in November from C$2.70 billion in the year-ago month.

Meanwhile, Canada’s Prime Minister Justin Trudeau announced plans to suspend flights of major airlines to Mexico and the Caribbean for the next three months.

The price of crude oil, one of Canada’s major export products, declined 0.3% to settle at $52.20 per barrel on Friday, with Canadian government bond yields remaining mixed on the last trading day of January.

The CAD/USD forex pair traded slightly higher to close at 1.2781 on Friday.

For the week, the CAD/USD lost 0.35%, following a volatile trading session on Wall Street. The forex pair declined around 0.4% in January.

What to watch: Markets await data on manufacturing PMI from Canada. The IHS Markit manufacturing PMI increased to 57.9 in December, from 55.8 in November.

Rising covid-19 cases remain a major concern for the markets, with total infections approaching 103 million globally.

Other Markets: European trading indices closed lower on Friday, with the FTSE 100, German DAX 30 and French 40 down by 1.82%, 1.71% and 2.02%, respectively.

Support & Resistances
for Today

     

market snapshot

     

Futures at 0400 (GMT)

What else to watch today

     

Germany’s retail sales and manufacturing PMI, Turkey’s manufacturing PMI, Spain’s manufacturing PMI and new car sales, Italy’s manufacturing PMI and unemployment rate, France’s manufacturing PMI and new car registration, Eurozone’s manufacturing PMI and unemployment rate, UK’s consumer credit, mortgage approvals, mortgage lending and manufacturing PMI, South Africa’s total vehicle sales, India’s balance of trade, Brazil’s manufacturing PMI and balance of trade, Argentina’s tax revenue as well as Russia’s money supply M2 and gross domestic product.

 

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