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Market Wrap: Stock Sink After Federal Reserve Talk Hiking Rates

By Stephen Kirkland and Vildana Hajric

Stocks fell in a decisive pivot that snapped the longest weekly rally since November, as short-sellers resurfaced and investors turned cautious after Federal Reserve officials beat the drum on hiking rates. Treasury yields climbed, while the dollar capped its best week since April 2020.

An electronic ticker at the Philippine Stock Exchange (PSE), operated by Philippine Stock Exchange Inc., in Taguig, the Philippines, on Friday, June 24, 2022. The exchange will permanently close its trading floor after the pandemic hastened its migration to “floorless trading” amid a digital shift that’s changing the operations of capital markets. Photographer: Veejay Villafranca/Bloomberg

The S&P 500 Index notched its biggest daily decline since June, sending the benchmark to its first weekly loss in five weeks. The tech-heavy Nasdaq 100 underperformed major benchmarks, with growth-related stocks among the hardest hit Friday. Meanwhile, Wall Street’s fear gauge, the Cboe Volatility Index, jumped the most in more than two weeks, back above 20. 

Expiration of $2 trillion in options, obliging investors to either roll over existing positions or start new ones, set the stage for a volatile session as failure to break a key threshold for the S&P 500 around 4,300 appeared to open the door to selling positions. And bears pounced. A basket of the most-shorted stocks dropped more than 6%, extending its weekly loss to 12% and giving short sellers their best week since March 2020. 

In a blow to individual investors, high-flying meme stock Bed Bath & Beyond tumbled more than 40% after Ryan Cohen sold his entire stake in the retailer. Cryptocurrency-linked stocks tumbled, tracking losses in Bitcoin: Coinbase Global Inc., Marathon Digital Holdings and Riot Blockchain Inc. each dropped more than 10%. Bitcoin sank back below $21,500 apiece.

One bright spot in the equity space was Occidental Petroleum Corp., rallying the most since March on news that Warren Buffett’s Berkshire Hathaway Inc. won approval from US regulators to buy as much as 50% in the oil company.

Against a backdrop of fear and volatility, the dollar marched higher for a third day in a row. Treasuries fell, with the two-year Treasury yield, the most sensitive to policy changes, jumping 4 basis points. 

Ahead of the Fed’s Jackson Hole gathering next week, officials reiterated their resolve to raise rates to curb stubbornly high inflation. In comments Thursday, two voting members of the Federal Open Market Committee — St. Louis’s James Bullard and Kansas City’s Esther George —  stood firm on the need to hike rates, though they diverged on the size of the September move. Richmond’s Thomas Barkin echoed that resolve on Friday, noting the risk those efforts could cause a recession. 

“Fighting the Fed is not a good policy at this juncture,” Jose Torres, senior economist at Interactive Brokers, said in an interview. “If you didn’t fight the Fed while they were engaging in quantitative easing and they boosted asset prices, why would you fight the Fed now when they’re engaging in the opposite. The same way we got a really violent summer bear-market rally, you can have those moves exacerbated the other way, particularly as liquidity conditions tighten.”

The pullback in equities this week follows a rally that has propelled the S&P 500 up more the 15% from its mid-June nadir amid speculation that the Fed may scale back its aggressive path of rate hikes. And a force that contributed to the rally is now showing signs of fatigue, with hedge funds dialing down purchases of shares.

Other Fed officials joined the chorus of a hawkish stance in the runup to the annual symposium at Jackson Hole Aug. 25-27. San Francisco’s Mary Daly pushed back against bets for rate cuts before the end of 2023 and Minneapolis’s Neel Kashkari said that “we have an inflation problem right now,” and that the central bank has to get it down “urgently.”

“We think the Fed is likely to put an exclamation point on any premature notion that easing is in the cards, and we think they might do that with more hawkish commentary,” Leo Grohowski, CIO at BNY Wealth Management, said by phone. “There’s been a big change in sentiment and perhaps a little bit too much complacency here built in the short term.”

Other market commentary

  • “Markets have been rallying on the back of three assumptions: a moderated recession-to-come, a Fed pivot and an earnings expansion: from that perspective, this week has been sobering with notably a negative macro news flow,” Florian Ielpo, head of macro research at Lombard Odier Asset Management, wrote. “This week, we have seen a pause in this bear market rally which has not yet mutated into a turning point. The macro-heavy next two weeks should bring about more clarity in this matter.”
  • “It is patently clear that the Fed has inflation reduction as its main aim, even though it acknowledges the knock-on risk of derailing the economy,” Richard Hunter, the head of markets at Interactive Investor International in Leeds, UK, said. “Comments from several Fed officials suggest that there remains some way to go before victory can be declared on taming inflation.”

Some of the main moves in markets:

Stocks

  • The S&P 500 fell 1.3% as of 4 p.m. New York time
  • The Nasdaq 100 fell 1.9%
  • The Dow Jones Industrial Average fell 0.9%
  • The MSCI World index fell 1.3%

Currencies

  • The Bloomberg Dollar Spot Index rose 0.5%
  • The euro fell 0.5% to $1.0041
  • The British pound fell 0.8% to $1.1832
  • The Japanese yen fell 0.7% to 136.78 per dollar

Bonds

  • The yield on 10-year Treasuries advanced 10 basis points to 2.98%
  • Germany’s 10-year yield advanced 13 basis points to 1.23%
  • Britain’s 10-year yield advanced 10 basis points to 2.41%

Commodities

  • West Texas Intermediate crude fell 0.4% to $90.13 a barrel
  • Gold futures fell 0.6% to $1,761 an ounce

More stories like this are available on bloomberg.com.

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