US Stocks Erase Gains as Crypto Roils Sentiment: Markets Wrap

(Bloomberg) — U.S. stocks erased gains in volatile trade as investors turned cautious amid declines in some risk assets. Treasury yields fell and the dollar pared losses.

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The S&P 500 pulled back sharply from session highs and the technology-heavy Nasdaq 100 plummeted into the red. The sudden decline in stocks coincided with a decline in Bitcoin that shook market sentiment. The yield on two-year Treasuries, more sensitive to changes in Federal Reserve policy, fell 4 basis points, while a gauge of the dollar pared the decline.

“The Bitcoin/crypto mini-crash destabilized the stock market and caused a sharp drop,” said Jay Hatfield of Infrastructure Capital about the sudden takeover of FTX by Binance Holdings. “Investors don’t like to see any disruptions or mini-crashes in any risk assets.

The pullback comes as investors eye potential problems from midterm elections. Still, any final outcomes may not be known for days or even weeks if the races are as close as polls suggest and if the losers challenge the results.

A history of robust performance following interim results has helped bolster optimism about the outlook for equity markets. While polls suggest Republicans could make gains, putting a check on Democratic politics, there are several scenarios. The best outcome for treasuries could be Republican control of both the House and Senate, while the dollar could find support if Democrats retain both chambers.

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For many, the biggest headwind for the markets is the Fed’s monetary policy tightening with Thursday’s consumer price index data. The next event risks coming on the heels of core consumer prices rising more than expected to a 40-year high in September. Although rates are beginning to moderate, the CPI is well above the Fed’s comfort zone.

Going forward, it could be a tough line for policymakers, according to Art Hogan, market strategist at B. Riley Wealth.

“Divided governments, especially leading to a presidential election, are most likely to create a gridlock where very little gets done,” Hogan wrote. “That’s probably a good thing for the Fed because various stimulus hasn’t made their job any easier.”

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• “The more and more you get just polls or even some small acknowledgments from places that the Republicans are probably going to pick up at least one chamber of Congress, I think the market actually sees that as a good outcome,” Shawn Cruz, chief trading strategist at TD Ameritrade, said in an interview. “They actually want a little bit of gridlock out of Washington.”

• “The inflation statistics are going to be more important than the election,” Michael Darda, chief economist at MKM Partners, said on Bloomberg TV. “Inflation will tend to lag behind the cycle, so if you have the Fed chasing lagging indicators with a very rapid succession of rate hikes and quantitative easing, there is a very significant risk that the Fed will significantly overshoot neutrality.”

• “The gridlock rally is a bit overblown, as we were already there,” said Victoria Greene, G Squared Private Wealth CIO. “Investors need to temper expectations for the results coming tonight. Many contested races, it could be weeks, or God forbid, months before we know the results. Politics matters personally, less to the markets.”

Treasuries rose across the board on Tuesday, with the benchmark 10-year yield falling as much as 8 basis points. Meanwhile, traders shaved bets on interest rate hikes, with swaps still leaning toward a 50 basis point Fed hike in December.

Nvidia Corp. climbed when it started producing a processor for China. Take-Two Interactive Software Inc. fell after cutting its forecast for net orders.

Europe’s Stoxx 600 moved up, after a weak opening. Chinese stocks halted a rally as traders weighed a jump in virus infections and official comments defending Covid Zero.

Important events this week:

• US midterm elections Tuesday

• EIA oil inventory report, Wednesday

• China aggregate financing, PPI, CPI, money supply, new yuan loans, Wednesday

• US wholesale inventories, MBA loan applications, Wednesday

• Fed officials John Williams, Tom Barkin speak at events Wednesday

• US CPI, US first unemployment claim, Thursday

• Fed officials Lorie Logan, Esther George, Loretta Mester speak at events Thursday

• US University of Michigan consumer sentiment, Friday

Some of the main features of markets:

Stock

• The S&P 500 was little changed as of 2:23 p.m. New York time

• The Nasdaq 100 fell 0.2 percent

• The Dow Jones Industrial Average rose 0.4 percent

• The MSCI World index rose 0.3 percent

Currencies

• The Bloomberg Dollar Spot index fell 0.3 percent

• The euro rose 0.4% to $1.0059

• The British pound rose 0.1% to $1.1529

• The Japanese yen rose 0.7% to 145.66 per dollar

Cryptocurrencies

• Bitcoin fell 12% to $18,245.91

• Ether fell 16% to $1,316.16

Bonds

• The yield on 10-year government bonds fell eight basis points to 4.14%

• Germany’s 10-year yield fell six basis points to 2.28%

• UK 10-year yields fell nine basis points to 3.55%

Raw materials

• West Texas Intermediate crude fell 2.8% to $89.24 a barrel

• Gold futures rose 2.1% to $1,715.20 an ounce

–With assistance from Jan-Patrick Barnert, Haidi Lun, Brett Miller, Srinivasan Sivabalan, Isabelle Lee, Natalia Kniazhevich and Vildana Hajric.

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