Stock markets are in the grip of a Nineties-style tech frenzy as an army of retail investors pump up shares such as GameStop, the Bank for International Settlements has said.
The Basel-based institution, known as the central banker’s central bank, highlighted the record highs reached by stock markets in February and fired a warning shot over highly leveraged share trades that “raise concerns about market functioning”.
The BIS said that market chaos was made worse by the actions of groups such as Reddit’s WallStreetBets forum, which used options to trigger a 20-fold increase in GameStop’s shares in January, boosting their bets on the stock with borrowed money.
In its quarterly report, the organisation said: “There is evidence that retail investors are currently taking risky one-way bets, as rapid surges in margin debt have been followed by periods of stock market declines.”
A surge in equity fundraising using listed “blank cheque” companies - which raise money without an immediate investment plan to buy private businesses - “revived memories of the late 1990s tech boom”, the BIS added.
These special purpose acquisition companies or Spacs have raised more than $50bn (£36bn) already this year according to figures from Bain & Co.
Money has flooded out of government bonds and into the stock market amid a surge in optimism that vaccines can bring the Covid crisis to an end. The boom has also been driven by record low interest rates aimed at tackling the pandemic, and the prospect of a huge $1.9 trillion stimulus fuelling a return of inflation.
The US Dow Jones Industrial Average traded above 32,000 for the first time last week and traders have bet heavily on so-called meme stocks such as Gamestop which were hyped heavily online, as well as tehc firms such as Tesla and online currencies including bitcoin.
But the BIS also warned that bankruptcies triggered by the pandemic could wipe as much as $1 trillion from the value of corporate debt markets by 2022.
Company insolvencies “are expected to rise as measures to support credit are wound back, new consumption habits and business practices accelerate the downsizing of specific sectors”, its economists wrote.
Its analysis of the G7 nations as well as Australia and China put the UK as the biggest victim of corporate credit losses, amounting to 5.1pc of GDP by 2022. The losses “will need to be absorbed either by the financial system or by taxpayers”, it added.