By Ye Yuan & Maxwell Masur
Financial News
Analysis
The AP Twitter Hoax
On Tuesday, April 23, 2013, at
1:08pm, the Associated Press twitter account had reported that a bomb had gone
off and that President Obama was injured. By 1:10pm, markets sank, including
the Dow Jones Industrial Average, which sank 145 points in a matter of minutes.
But by 1:13pm, when the Associated Press had announced that its account had
been hacked, the DJIA instantly rose right back up, even higher than its
preceding level. So why did this happen? How did one false tweet from the
Associated Press affect the DJIA so quickly?
Over the
last couple of years, we have seen breaking news that have made the market move
drastically, such as the crisis in Greece, or new elections opening. People
nowadays are always looking for the most breaking news in the soonest possible
time in order to gain an advantage over others on the market. In Twitter’s
case, tweets are very easy to access and can break the most recent news
instantly. So in this case, effects commenced: people and highly advanced
trading computers read the tweet, processed the possible implications, and sold
stock immediately. Then, when AP responded that its account had been hacked,
the reverse happened; people and computers then bought back stock in order to
rebound on their losses in the first four minutes. In the five-minute span of
the hacked AP tweet and the second tweet admitting that the account had been
hacked, the DJIA had decreased 145 and then rebounded slightly higher than
where it started five minutes before.
The largest
cause of the changes in stock was due to new, highly advanced computer programs
that can read and identify market alterations from breaking news. In this case,
a tweet from the AP that said bombs had gone off in the White House went
through highly-advanced algorithms. These computer-driven, high frequency
advanced trading tables “are incredibly sophisticated. A program reading the
feed and seeing ‘blowing up’ can also read the one saying the account was
‘hacked.’” said Matthew Shaft, an hedge-fund trader. Based on the reliability
of the source, the computer makes an instant buy-or-sell decision. In this
case, it sold instantly when it noted the political instability of the
President being injured, and then bought again once it read the account had
been hacked.
The increase
disclosing information through social media websites, through twitter and Facebook,
has become a critical advantage to some in the market. In 2010, a study was
released from Indiana University noting that, “Twitter could with more than 85%
accuracy predict the daily up and down readings of the Dow.” (The Wall Street
Journal). Additionally, Netflix watched its stocks rise when it disclosed
information about higher-than-expected earnings for its first quarter in 2013
through Twitter.
The
Associated Press false tweet illustrates just how heavily companies rely on
both advanced computer technology and social media networking to manage stocks
effectively. Though errors like this are an effect of dependency of technology,
companies are not deterring from releasing market-moving information over the
Internet anytime soon. Wall Street firms are currently working on new ways for
employees to be able to access Social Media websites while at work, since many
would like to use social media as an accompaniment with “traditional” new
websites.
Netflix
Netflix Inc
stock increased drastically about 24 percent on Tuesday to its highest level
since September 2011. This was happened after the Netflix announced its movie
streaming service added more than 2 million U.S. subscribers last quarter.
“Despite the
already big jump, at least eight brokerages, including JPMorgan, BMO Capital,
Morgan Stanley, Barclays and Oppenheimer & Co, raised their price targets
on the stock by as much as $75 to as much as $250”(Vlastelica, Mukherjee).
For its $8-a-month U.S. streaming service, the largest part
of its business, Netflix now has 29.2 million U.S. customers. “Four billion
hours were streamed in the quarter - highlighting how the company's subscriber
base is increasingly using Netflix for a growing share of their viewing trends,”
BMO Capital said.
Morgan Stanley analyst
DeVitt wrote: “Besides boosting subscriber numbers, the push for exclusive
content will probably increase margins in line with Netflix's premium TV
network peers” (Reuters).
Euro-Zone (Germany) Financial Crisis
“The German IFO business climate survey for April was reported at a three month low of 104.4, disappointing expectations for 106.2 and down from 106.7 in March” (Spier).
“The IFO survey of current
assessment was reported at 107.2, down from 109.9 in March; the expectations survey
was reported at 101.6, down from 103.6. A survey result above 100.00 indicates
a positive outlook” (Spier).
Reminder: Germany is the biggest and strongest
economy and the primary growth engine in the Euro Zone and it accounts for 28
percent of the 17-country Euro Zone's total output. However, evidence that
Europe's economic downturn is weighing more heavily on its strongest member
Germany. A slowdown in Germany‘s economy would make it harder for the region to
climb out of recession.
The German data
will raise fears “that the region’s largest growth engine has moved into
reverse, thereby acting as a drag on the region at the same time as
particularly steep downturns persist in France, Italy and Spain” (Watts).
Rate Cut
With
interest rates in the United
States and Japan at or near zero, an ECB rate cut would diminish the euro's
yield advantage. The ECB has refrained from pumping massive amounts of money
into the euro zone through asset purchases, unlike the Federal Reserve or the
Bank of Japan's actions on their economies.
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- Low rates in theory encourage borrowing to spend and
invest, stimulating the economy. A rate cut also can push investors toward
buying stocks and other assets, both in anticipation of growth and by
making interest-yielding investments less attractive.
- Lower rates can push down the euro's exchange rate because they lower the yield on many interest-bearing investments denominated in euros. That reduces demand for the currency.
Several
ways to save European’s economy beyond rate cut
The European Central Bank has also been trying to find
unspecified new way to boost the economy that go beyond interest rates.
Ideas that have
been floated include that the ECB might take steps to try to increase bank's
willingness to make loans to small and medium size businesses, which provide
most of the euro-zone's jobs. The ECB might also agree to loan guarantees from
another European Union agency, or permit banks to bundle loans to small
businesses as securities and use them as collateral to get cash loans from the
ECB.
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