Cboe’s Vix volatility index subsided to 30 on Thursday, having rocketed to almost 40 on Wednesday © FT montage

Wall Street stocks rebounded from their worst day since October, as easing volatility reduced the pressure on hedge funds to keep closing out positions.

The blue-chip S&P 500 rose 1 per cent in New York on Thursday, having slipped 2.6 per cent on Wednesday after hedge funds rapidly unwound trades in the midst of a dramatic jump in volatility that had been fuelled by a rapid rally in stocks targeted by Reddit users.

The tech-heavy Nasdaq Composite rose 0.5 per cent and the Dow Jones Industrial Average moved 1 per cent higher, clawing back from dips of 2.6 per cent and 2.1 per cent, respectively.

“It’s a reversal from yesterday. We saw it start to take shape overnight,” said Max Gokhman, head of asset allocation at Pacific Life Fund Advisors. “We are starting to see some normalcy today.”

Cboe’s Vix volatility index, a measure of implied volatility in the stock market nicknamed Wall Street’s “fear gauge”, subsided to 30 on Thursday, having rocketed to almost 40 on Wednesday.

“Hedge funds had to cut back dramatically [earlier in the week],” said Andy Brenner, head of international fixed income at National Alliance Securities. “That’s why the markets got crushed. As volatility goes down it allows people to come back in and put on positions.”

GameStop, the New York-listed company at the centre of the extraordinary battle between day traders and hedge funds, whipsawed during another hectic day of trading, rising almost 40 per cent in the morning before tumbling in the afternoon to be over 40 per cent lower for the session.

The broad stock market rally also shrugged off disappointing US economic data. Economic output grew 4 per cent, on an annualised basis, at the end of 2020, well down on the 33 per cent expansion registered in the third quarter.

“After a day like yesterday you can’t assign too much gravity to the data driving markets,” said Mr Gokhman. “There will be volatility and there will be corrections in this market. There’s a lot of froth.”

In Europe, the region-wide Stoxx 600 index edged up 0.1 per cent, having dropped as much as 2 per cent earlier in the day. Frankfurt’s Xetra Dax rose 0.3 per cent and London’s FTSE 100 benchmark fell 0.6 per cent.

Holding back investor optimism were concerns about new variants of coronavirus and the EU’s wrangle with AstraZeneca over the delivery of Covid-19 vaccines.

“The ongoing dispute between AstraZeneca and the EU over vaccine supplies has raised the risk of delays to the region’s vaccine campaign and weighed on stocks across the euro area,” said Candice Bangsund, portfolio manager at Fiera Capital.

In Asia-Pacific trading, Japan’s benchmark Topix lost 1.1 per cent, while in Australia the S&P/ASX 200 dropped 1.9 per cent. Hong Kong’s Hang Seng index, which hit multiyear highs earlier this week, weakened 2.6 per cent and the CSI 300 index of Shanghai and Shenzhen-listed shares closed down 2.7 per cent.

In China, where the recovery from coronavirus is more advanced than in other big economies, an adviser to the central bank this week warned that asset bubbles would persist unless monetary policy was adjusted.

The People’s Bank of China withdrew Rmb150bn ($23.2bn) of liquidity on Thursday through its open market operations — a process through which the central bank and the banking system lend to one another — in the biggest such move since October.

Ken Cheung, chief Asia foreign exchange strategist at Mizuho Bank, suggested that “fears of deleveraging drove China and Hong Kong equities lower” on Thursday.

However, “investors should monitor, but not fear, the risk of a correction”, said Tai Hui, chief Asia market strategist at JPMorgan Asset Management, who added that he was “still constructive on the global economic fundamentals” over the next 12 to 18 months. That should support equities, emerging market debt and corporate credit, he said.

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