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Stocks Drop in Heavy Trading, Bond Curve Flattens: Markets Wrap

By Rita Nazareth

Volatility gripped financial markets, with investors bracing for a rebalancing of the S&P 500 and the expiration of equity derivatives.

Stock moves were magnified by intense activity in options trading, potentially making Friday one of the busiest days of the year. The benchmark gauge of American shares extended its weekly losses amid volume that was 30% above the average of the past month. With the holidays fast approaching, it could be the last day of 2021 with enough liquidity for investors to trade in and out of large positions.

nyse trading floor

The dollar advanced after Federal Reserve Governor Christopher Waller said that a rate hike will be warranted “shortly after” the central bank concludes its asset purchases early next year. The spread between U.S. Treasury 5-year and 30-year Treasuries flattened to session lows.

Traders also reassessed their bets for the coming months after policy makers decided the coronavirus is no longer calling the shots in their economies, with inflation becoming a bigger threat. In the last couple of days, central banks in the U.S. and Europe have pivoted –- at varying speeds — toward tighter policy. Such backdrop has investors questioning whether stocks are due for a rougher patch, following a huge rally from pandemic lows.

The hawkish tilt by policy makers has also put the highly valued cohort of big technology companies on the spotlight. The group of marquee names like Apple Inc., Tesla Inc. and Amazon.com Inc. has faced intense gyrations, surging in the immediate aftermath of the Fed decision on Wednesday, tumbling on the next day and swinging between gains and losses on Friday.

Comments:

  • “Even though we’re coming from a place of very liquid markets and a lot of accommodation, the directional change and the pull forward in the taper schedule and the potential rate-hike schedule… this is a velocity change that we’re seeing and that’s really what the market is digesting,” Anna Han, equity strategist at Wells Fargo Securities, told Bloomberg Television.
  • “Our advice to investors is to stay invested, but be cautious. While it’s generally a wise idea to stay invested through any downturns or periods of volatility, it’s also important for investors to know their own risk tolerance as each investor has a different appetite for risk,” said Robert Schein, chief investment officer at Blanke Schein Wealth Management.
  • “The cyclical value sectors such as energy, materials and industrials have historically done well leading up to the start of Fed rate hikes. We wouldn’t be surprised to see value stocks make another run as the economy picks up some speed after the latest waves of Covid-19 variants fade — hopefully soon,” said Jeffrey Buchbinder, equity strategist at LPL Financial.

In another sign that investors are wary about the implications of tighter policy on frothier pockets of the market, the MSCI World Growth Index of companies with stronger earnings expansion has largely underperformed its value counterpart this month.

The old stock market adage of “buy the first hike, sell the penultimate rate hike” could go wrong this time with inflation running hot, according to Bank of America Corp.

“Little cracks” were appearing in megacap tech before tightening even began, Michael Hartnett, BofA’s chief investment strategist, wrote in a note. He remains bearish until investor positioning “shows full-blown capitulation” or a credit event on Wall Street causes central banks to announce a reversal of tightening.

Corporate highlights:

  • Elon Musk offloaded a second batch of Tesla Inc. shares in a matter of days and is now three-quarters of the way done selling 10% of his stake in the company.
  • FedEx Corp. jumped after raising its outlook and posting earnings that handily beat analysts’ estimates.
  • Rivian Automotive Inc. slumped after the electric-truck maker’s debut earnings report revealed a slower-than-expected increase in production.
  • Darden Restaurants Inc., the operator of Olive Garden restaurants, dropped after its forecast fell short of estimates and the company said its chief executive officer will retire next year.

Some of the main moves in markets:

Stocks

  • The S&P 500 fell 0.4% as of 1:55 p.m. New York time
  • The Nasdaq 100 rose 0.1%
  • The Dow Jones Industrial Average fell 0.9%
  • The MSCI World index fell 0.5%

Currencies

  • The Bloomberg Dollar Spot Index rose 0.4%
  • The euro fell 0.6% to $1.1257
  • The British pound fell 0.5% to $1.3253
  • The Japanese yen was little changed at 113.73 per dollar

Bonds

  • The yield on 10-year Treasuries was little changed at 1.41%
  • Germany’s 10-year yield declined three basis points to -0.38%
  • Britain’s 10-year yield was little changed at 0.76%

Commodities

  • West Texas Intermediate crude fell 2.4% to $70.64 a barrel
  • Gold futures rose 0.2% to $1,802.50 an ounce

More stories like this are available on bloomberg.com.

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