The current sell-off may end up emboldening the bulls, if the last tech bubble is a guide


The bubble isn’t burst yet.


Justin Edmonds/Getty Images

Traders at the moment seem to have as much patience with tech stocks as Kansas City Chiefs fans do for a moment of unity.

Thursday was the fourth ugly finish in five sessions, with the Nasdaq Composite
COMP,
-1.99%

skidding 2%, and the other major indexes backtracking as well.

Andrea Cicione, head of strategy at independent investment research firm TS Lombard, said excessive leverage in the market really began in earnest in July. Cicione added that was occurring in U.S. stocks wasn’t happening anywhere else in the world.

And while he’s seeing signs of a bubble, he thinks if the selling doesn’t intensify, the bubble may reflate soon.

“The leverage accumulation so far may not be enough to burst the bubble just yet,” he writes. “If the recent selloff does not intensify further, the whole episode may end up simply emboldening the bulls to buy the dip and take even more risk.”

Between 1997 and 1998, the Nasdaq experienced three sell-offs of at least 17%, only to emerge stronger and rise four-fold to the 2000 peak. “Leverage is a key characteristic of all bubbles, and almost invariably it is the mechanism that leads to their collapse. But there may not have been enough leverage for the dot-com 2.0 bubble to burst just yet,” he says.

The reason leverage is important in bursting bubbles is because it uniquely can lead to forced unwinding. “When faced with margin calls they cannot meet, investors may have to liquidate positions against their will. The resulting fall in prices can instil doubts in the mind of others, persuading them to sell,” he said.

The buzz

Consumer price data for August is due at 8:30 a.m. Eastern.

The quarterly services survey and August budget deficit are also due for release. The Congressional Budget Office, which typically gets the budget picture pretty close to the mark, estimated the August deficit was $198 billion, and said the September-ending fiscal year gap will be the highest relative to the economy since 1945.

Database software giant Oracle
ORCL,
+0.66%

topped earnings and revenue expectations, helped by revenue from key client Zoom Video Communications
ZM,
-1.32%
.
Oracle also declined to discuss whether it will buy the U.S. operations of social-media company TikTok, as U.S. President Donald Trump said Thursday there will be no extension of the Sept. 15 deadline for it to be sold to a U.S. company or shut.

Peloton Interactive
PTON,
-3.75%
,
the exercise bicycle company, reported stronger-than-forecast fiscal fourth-quarter earnings and revenue, with its current year outlook also well ahead of estimates.

Jean-Sébastien Jacques, the chief executive of mining giant Rio Tinto
RIO,
-1.67%
,
announced he will resign in March following the controversy over the firm blowing up ancient caves while excavating for iron ore.

Thursday marked the first day since spring when new coronavirus cases in the European Union and the U.K. exceeded the United States.

The market

U.S. stock futures
ES00,
+0.65%

NQ00,
+0.64%

were stronger.

Gold futures
GCZ20,
-0.46%

fell while oil futures
CL.1,
+0.21%

edged higher.

The British pound
GBPUSD,
+0.18%

continues to reel from its more combative stance taken against the European Union in trade negotiations.

The chart

This incredible UBS illustration of Tesla
TSLA,
+1.38%

shows how shares have performed compared to other tech giants since joining the $100 billion market cap club. It took Apple
AAPL,
-3.26%
,
Alphabet
GOOGL,
-1.36%

and Facebook
FB,
-2.05%

between 4 to 11 years to achieve what Tesla did in three quarters. UBS increased its Tesla price target to $325 from $160 ahead of the company’s battery day presentation.

Random reads

Here’s the 2010 memo from a venture capital firm on an investment which valued retail software maker Shopify at $25 million. Shopify
SHOP,
-1.59%

is now worth $114 billion.

China said its U.K. ambassador’s Twitter account was hacked — after a steamy post was liked.

An experimental treatment kept mice strong in space, one that could have uses back on Earth.

Need to Know starts early and is updated until the opening bell, but sign up here to get it delivered once to your email box. The emailed version will be sent out at about 7:30 a.m. Eastern.



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After U.S. tech gains, European stocks pause as ECB decision awaits


(FILES) This file photo taken on March 12, 2020 shows flags of the European Union fluttering in front of the headquarters of the European Central Bank (ECB) in Frankfurt am Main, western Germany.


daniel roland/Agence France-Presse/Getty Images

European stocks were steady on Thursday, ahead of a European Central Bank decision and press conference in which expectations are for the central bank to raise concerns about the rise of the euro.

Up 1.6% on Wednesday, the Stoxx Europe 600
SXXP,
+0.16%

was little moved at 369.70.

U.S. stocks, particularly in the tech sector, broke a losing run on Wednesday, as the Nasdaq Composite
COMP,
+2.70%

rallied 2.7%. U.S. stock futures
ES00,
+0.05%

were modestly higher Thursday.

The ECB decision is due at 1:45 p.m. Central European time (7:45 a.m. Eastern), though analysts are focusing on the press conference with President Christine Lagarde at 2:30 p.m.

Attention also is in London, where an emergency meeting is being called on the U.K. decision to unilaterally amend its withdrawal agreement. Bloomberg News reported the European Union was considering a lawsuit.

Wm Morrison Supermarkets
MRW,
-3.51%

slumped 3.7% after reporting a 25% slump in first-half adjusted pretax profits, with the company flagging higher costs and reduced consumer demand for fuel. “Some traders will be wondering if Morrisons can’t post a rise in profit when a pandemic has driven up demand, when will they register a rise in earnings,” said David Madden, market analyst at CMC Markets UK.

Chemicals group Akzo Nobel
AKZA,
+3.47%

rose 4% as the company said revenue for the third quarter will be close to last year’s levels. It reported strong decorative paint demand in Europe and South America.

Games Workshop
GAW,
+13.92%
,
which makes miniature wartime figures, jumped 13% after saying its performance for the quarter ending Aug. 30 was ahead of its expectation



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Wall Street sees a bright side in ‘healthy’ tech selloff By Reuters


© Reuters. FILE PHOTO: A street sign is seen in front of the New York Stock Exchange on Wall Street in New York

By Lewis Krauskopf

NEW YORK (Reuters) – Some of Wall Street’s biggest players are viewing the stock market’s recent tech-led selloff as a bout of turbulence rather than the start of a longer slide — and they don’t see it as a reason to run for the door.

Invesco this week called the Nasdaq’s sharp decline a “healthy period of consolidation” while fund manager Lord Abbett said U.S. stock valuations are likely merited, based on an analysis of companies’ earnings.

On Sept. 4, Goldman Sachs (NYSE:) reiterated its year-end price target of 3,600 on the S&P 500, roughly 6% above the index’s close on Wednesday, while UBS Global Wealth Management recommended clients “ease into the markets” rather than stay on the sidelines.

Their optimism highlights how the Federal Reserve’s pledge to keep interest rates at record lows and hopes of a breakthrough in a vaccine for COVID-19 have underpinned market gains this year, though many remain wary that the U.S. presidential election and massive options bets on tech-related stocks could exacerbate market swings in the remaining months of 2020.

“What we think we are going through is a healthy correction, removing the froth,” said Troy Gayeski, co-chief investment officer of SkyBridge, an alternative investments firm. “We certainly could fall more. But if you’re a tech investor you had to understand that the valuations were very high.”

The Nasdaq posted its best day since April on Wednesday, a day after falling into correction territory, commonly defined as a fall of 10% or more from a recent peak. The other major indexes also rebounded on Wednesday after steep declines.

“I think of this rout not so much as a correction, but as a digestion,” Kristina Hooper, Invesco’s chief global market strategist, said in a recent note.

Second-quarter reported earnings on the S&P 500 were 23.1% above expectations, far above the trailing five-year average of 4.7%, analysts at Lord Abbett said in a recent note.

“Earnings momentum, and the magnitude of analyst earnings revisions, is outpacing that in other markets, suggesting that higher valuations on U.S. equities are merited,” the report said.

Still, some believe more volatility is in store. A recent poll of investors from UBS Global Wealth Management showed 65% viewed politics as their top concern, with the Nov. 3 U.S. presidential election just weeks away.

Prominent investor Stanley Druckenmiller – a skeptic of this year’s rally – again sounded a bearish note on Wednesday, warning on CNBC https://www.cnbc.com/2020/09/09/stanley-druckenmiller-says-were-in-a-raging-mania-and-the-next-3-to-5-years-will-be-challenging.html that the stock market is in a mania fueled by the Federal Reserve.

Uncertainty over huge options purchases by SoftBank Group Corp (T:) also hung over markets, creating another risk.

Gayeski, of Skybridge, said he could see an opportunity to increase equity risk if there was a sharper drop, such as the Nasdaq falling 20% or the S&P 500 declining 15% from their respective highs and there were other supportive signs for the market such as the Fed’s expanding its balance sheet further.

Any selling that spreads beyond the big tech-related stocks that have led markets higher could be an indication that the pullback may be extending further, said Willie Delwiche, an investment strategist at Baird.

In the coming days, Delwiche is looking for signs of increasing investor caution — such as buying of put options, outflows from equity funds and diminishing bullish views in surveys — that indicate any over-exuberance has waned.

Another indicator is how investors respond to key technical support levels, said Keith Lerner, chief market strategist for Truist/SunTrust Advisory. The Nasdaq, for example, on Tuesday closed below its 50-day moving average for the first time since April, but was back above it on Wednesday.

“If you see these markets just slice through support levels, that’s a sign that the sellers have the upper hand,” Lerner said.





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Asian stock markets gain following tech bounce, euro waits for ECB By Reuters


© Reuters. People wearing protective masks, following the coronavirus disease (COVID-19) outbreak, are reflected on a screen showing stock prices outside a brokerage in Tokyo

By Tom Westbrook and Jessica DiNapoli

SINGAPORE/NEW YORK (Reuters) – Asia’s stock markets snapped their longest losing streak since February on Thursday and rose following a bounce on Wall Street, though subdued trade in currency, commodity and bond markets suggested investors remain cautious about the outlook.

MSCI’s broadest index of Asia-Pacific shares outside Japan () gained half a percent, lifting away from a one-month low made on Wednesday.

Japan’s Nikkei () rose 0.5% and markets in Shanghai () and Hong Kong () opened higher. But pressure returned to the oil price on worries about soft demand, a harbinger of weaker global growth. [O/R]

An overnight rally in riskier currencies also paused, as foreign exchange traders look for the European Central Bank’s tone at its meeting later on Thursday to guide the next move for the euro, dollar and the broader market. [FRX/]

S&P 500 futures () and Nasdaq 100 futures () each fell 0.4% in Asia.

Indonesia’s main stock index () dropped 4% to its lowest in more than a month on news the country’s capital Jakarta will reinstate social distancing restrictions due to a rise in coronavirus infections.

“The price action suggests that strong buying interest remains on market corrections given the backdrop of ample central bank liquidity,” economists Liz Kendall and Brian Martin at ANZ Bank said in a note.

“However, with some volatility having returned to markets it’s too soon to say whether the rout is over, or whether last night’s recovery is simply a pause,” the added.

Overnight on Wall Street the tech-heavy Nasdaq () posted its steepest rise in more than four months, gaining 2.7%, to halt a three-session selldown that whacked tech stocks. ()

Stay-at-home companies such as Facebook Inc (O:) and Google-parent Alphabet Inc (O:) climbed, while electric-car maker Tesla Inc (O:) rebounded nearly 11%, a day after suffering its biggest ever percentage drop.

The Dow () rose 1.6% and the S&P 500 () 2% and bonds sold off in concert with the rally. The yield on benchmark 10-year U.S. government debt () rose about 2 basis points to 0.71% overnight, with soft demand at a $35 billion auction.

That retraced a little bit to sit at 0.6951% in Asia. [US/]

MARKET DISLOCATION

The rebound in equities has steadied a sharp selloff that has highlighted the fragility of a rally that has carried the Nasdaq up 70% from March lows.

“It’s a double-edged sword,” said Oriano Lizza, sales trader at CMC Markets in Singapore, as retail investors who had great success on the way up now facing a tougher environment.”

“This is where there’s a lot of trepidation,” he said. “The market structure is dislocated at the moment… with stimulus and (markets at) all time highs – there’s no reference point.”

The ECB policy decision at 1145 GMT, followed by a news conference from President Christine Lagarde at 1230 GMT, is the next focus for investors.

Earlier in the week worries that the bank is concerned at the euro’s recent rise had the euro under pressure.

However, hopes for an improving economic outlook, following a Bloomberg News report that ECB economic projections would be broadly steady since June, had the euro () on the front foot in Asia at $1.1817.

“The risk now is that the euro could lift after the ECB meeting, if that is the case and there is more confidence,” said Commonwealth Bank of Australia (OTC:) currency analyst Kim Mundy, something that would pull other currencies higher on the dollar.

Elsewhere oil prices paring some overnight gains on worries about fuel demand after data showed U.S. crude stockpiles rose last week, rather than dropping as expected.

Brent crude futures () fell 0.4% to $40.63 a barrel and U.S. crude futures () fell 0.6% to $37.82 a barrel. Gold was steady at $1,943 an ounce. [GOL/]

GRAPHIC: Asian stock markets https://product.datastream.com/dscharting/gateway.aspx?guid=516bc8cb-b44e-4346-bce3-06590d8e396b&action=REFRESH





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U.S. tech selloff hits equities, oil falls on demand worry By Reuters


© Reuters. People wearing protective masks, following the coronavirus disease (COVID-19) outbreak, are reflected on a screen showing stock prices outside a brokerage in Tokyo

By Stanley White and Jessica DiNapoli

TOKYO/NEW YORK (Reuters) – Asian shares fell on Wednesday and oil prices hit lows not seen since June after a rout in technology shares sank Wall Street for a third consecutive day and a major drugmaker delayed testing of a coronavirus vaccine.

MSCI’s broadest index of Asia-Pacific shares outside Japan () slid 1.06%. Australian stocks () dropped 2.47%, while shares in China () fell 1.53%. Japan’s Nikkei () skidded 1.12%.

U.S. S&P 500 E-mini stock futures () erased losses and rose 0.25%, white Nasdaq futures () also rose 0.83%.

Euro Stoxx 50 futures () were down 0.03%, German DAX futures () fell 0.14%, and futures () fell 0.29%.

Sentiment for equities and other risky assets also took a hit after AstraZeneca Plc (L:) paused a late-stage trial of one of the leading COVID-19 vaccine candidates due to an unexplained illness in a study participant.

Treasury yields extended declines as investors sought the safety of holding government debt. Risk aversion also pushed the yen to a one-week high against the dollar.

A sell-off in high-flying U.S. technology shares, fueled partly by concerns about excess purchases of call options, has increased the risk of a larger correction across other markets.

“The performance of Wall Street is going to leave a heavy residue, and most noteworthy is how the tech names dropped down quite aggressively. Investors will take a close note of that,” said Tom Piotrowski, a markets analyst at Australian broker CommSec.

“The dramatic fall in oil prices in the last day is being seen as a proxy for global growth expectations. That 7.6% fall will certainly be resonating.”

The Dow Jones Industrial Average () fell 2.25%, the S&P 500 () lost 2.78%, and the Nasdaq Composite () dropped 4.11% on Wall Street on Wednesday.

Among U.S. technology names, electric-car maker Tesla (O:) plunged 21.06% on Tuesday, its biggest daily percentage drop, after it was excluded from a group of companies being added to the S&P 500.

SoftBank Group Corp (T:) shares fell 3.64% on Wednesday due to worries about the Japanese conglomerate’s trading in call options on U.S. tech stocks.

SoftBank has fallen around 12% since sources told Reuters and other media late last week that it built up stakes in major U.S. tech companies worth around $4 billion and bought a similar amount of call options for the underlying shares.

Counterparties who sold the call options to SoftBank would have to hedge their exposure by buying the underlying shares, which likely contributed to the Nasdaq () and S&P 500 () reaching record highs only days ago, some traders say.

Options are pricing in bigger market swings from Sept. 16 to Oct. 16, according to one investor.

The U.S. Federal Reserve’s next meeting ends on Sept. 16, which could have a big impact on stock markets because many analysts say excess liquidity created by the Fed has contributed to rising equity prices this year.

U.S. 10-year Treasury yields () fell to 0.6690%, while the yield curve between two-year and 10-year notes flattened slightly, highlighting declining appetite for risk.

The British pound fell to six-week lows against both the dollar and the euro.

Escalating concerns over Britain leaving the European Union without a trade agreement are weighing on sterling.

The () against a basket of six major currencies stood near a four-week high as Wall Street’s sell-off and renewed fears about Brexit boosted safe-harbour demand for the greenback.

Oil futures extended their sharp decline to the lowest levels since June due to concern about weak global energy demand and excess supply.

Brent () fell 0.63% to $39.53 a barrel, while U.S. crude () lost 0.73% to trade at $36.49.





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