The ASX 200 staged a steadying bounce in late trading Thursday to soften what was a savage day for investors.
Thanks to the volatile trading on Wall Street on Wednesday, the Australian market slumped all day.
Despite the late rally, it still fell by 1.9% on Thursday to record its worst single-day performance since September.
At one stage the market shed $55 billion in value – as it was it closed with a loss of $40 billion.
The local benchmark fell by 130.9 points to close at 6,649.7, with only the utilities sector finishing in front.
At one stage the index was down more than 185 points or 2.7%
US-Australian packaging firm Amcor was the only of the top 20 companies by market cap to finish higher.Asian markets joined in the sell-off with losses of more than 1%.
MSCI’s broadest index of Asia-Pacific shares outside Japan dropped 1.8%, Japan’s Nikkei fell 1.3%, its sharpest drop since October, and Chinese blue chips lost 2.4% as liquidity tightened before the Lunar New Year holidays.
South Korea’s Kopsi fell 1.7% led by losses in Samsung after it reported earnings.
Reuters reported that there were no obvious triggers for the slide, “rather many seemed to have rushed for the exits at the same moment in a market that had been priced for perfection.”
“Dealers said highly leveraged investors were taking profits where they could to cover losses elsewhere, leading to sharp falls in a lot of overcrowded trades.”
Small traders operating through a page on the reddit pages (more than 2 million) have been pushing share prices in selected companies higher, squeezing short sellers to the point where they broke on Wednesday and quit their positions.
But while short covering usually sees the share prices surge, in this case the hedge funds and other big investors sold off other positions to raise cash to maintain liquidity.
Reuters said that retail investors forced a massive squeeze on hedge funds with short positions in stocks such as GameStop.
“GameStop and several other highly-bid stocks later retreated in extended trade after Reddit briefly restricted access to its popular WallStreetBets site,”R reported yesterday afternoon.
“The Reddit army should prepare for stricter rules and regulation shortly, which should kill the idea that what happened with GameStop will happen with others,” Edward Moya, a senior market analyst at OANDA told Reuters.
This volatility was peaking just as the Fed’s post meeting statement emerged on Wednesday afternoon which revealed a gloomy change of words to describe the health of the US economy.
The US central bank said economic activity was “moderating’ because of the impact of COVID on some sectors and in giving voice to these concerns, switched the focus of the market to the economy ahead of the first GDP estimate for the December quarter and the latest first time unemployment benefits claims on Thursday.
