Daily Brief: Another Witching Day, Another Challenge For Retail Investors

Daily Brief: Another Witching Day, Another Challenge For Retail Investors

over 2 years ago3 mins

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A “witching day” on Friday saw several options and futures contracts expire, and investors were looking for a sign – any sign – of what might come in the great beyond.

What does this mean?

Four times a year, a slew of major derivative contracts on US stocks all expire at once. That leaves investors with a decision to make: buy and keep the related shares, or “roll forward” those contracts by buying ones with a later expiry date. All investors’ subsequent buying and selling on Friday, then, risked making the US stock market extra volatile. Only problem was, analysts couldn’t tell whether all that extra activity would be a good thing or a bad thing…

A wild day

Why should I care?

For markets: There were big scores to settle.

Goldman Sachs estimated that there were about $2 trillion worth of options and futures contracts on US stocks expiring on Friday. That’s a lot, sure, but the proportion of contracts whose agreed-upon “strike prices” were within 10% of current prices was as small as it’d been in the last 10 years. That’s important because an investor is more likely to exercise their option – that is, the right to buy or sell at a given strike price and date – if that strike price is close to the current price of the asset. So while there might be some volatility, it would be much more significant if a bigger proportion of those options’ strikes were closer to current prices.

For markets: It helps to see these things coming.

Most institutional investors will have been well aware of the potential for an uptick in volatility, but it might’ve come as a surprise to retail investors. And while the big-hitters haven’t historically paid much attention to things that unsettle their smaller counterparts, they might want to do just that: retail investors now hold 35% of all US stocks and – thanks to the recent surge in popularity of commission-free trading apps – account for one-fifth of all stock trading.

Ownership of US equity market

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Tesco And Kroger Reported Strong Earnings

Tesco image

Two giants of the global grocery industry – Kroger and Tesco – reported earnings late last week, and investors canceled all their plans so they’d be in when they arrived.

What does this mean?

The pandemic’s generally been a boon for grocery retailers: their stores stayed open when almost everything else was closed, and even the extra costs of safety measures were partly offset by strong sales growth. That might be why Tesco – the UK’s biggest retailer (for now) – saw its revenue at existing stores come in ahead of expectations last quarter. An uptick in food sales was matched by those in the company’s clothing and wholesaler segments, probably as more people got all dressed up for real-life brunch. It was a similar story across the pond: America’s number-two grocer Kroger likewise reported better-than-expected quarterly revenue and profit.

Kroger sales
Source: The Wall Street Journal, FactSet

Why should I care?

The bigger picture: A read on inflation.

Grocers’ earnings give you an important insight into how fast the prices of consumer goods are rising. Kroger, for its part, is anticipating inflation in the products it sells of 1-2% this year, which looks likely to be accurate. The retailer plans to pass on those higher costs to customers, but it also stands to benefit from them: higher prices tend to incentivize consumers to switch to Kroger’s own-brand stuff – which typically delivers a higher profit margin than third-party items – as a way of saving money.

For markets: A mixed bag.

Kroger also upped its profit predictions for this quarter, which might be why its share price rose 4% following its earnings report. But Tesco’s forecast stayed put, and its stock fell 4%. Then again, competition in its key UK grocery market is notoriously fierce, particularly on price. And with inflation increasing, Tesco may struggle to meet its profitability goals even if sales continue to grow.

Tesco stock
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