US Stocks Fall as Crypto Upends Risk Sentiment: Markets Wrap

(Bloomberg) — US stocks fell in volatile trading amid sharp declines in some risk assets and as investors turned broadly cautious ahead of results from midterm elections. Treasury yields fell and the dollar trimmed losses.

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Both the S&P 500 and the tech-heavy Nasdaq 100 slid into the red. The sudden move lower in stocks coincided with a lurch lower in Bitcoin that rocked market sentiment. The yield on two-year Treasuries, more sensitive to Federal Reserve policy changes, shed 4 basis points, while a gauge of dollar pared declines.

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

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

A history of robust performance following midterm results has helped buoy optimism about the outlook for equity markets. While polls suggest Republicans could make gains, thereby placing a check on Democratic policies, there are multiple scenarios. The best outcome for Treasuries could be a Republican control of both the House of Representatives and Senate, while the dollar could find support should Democrats keep both chambers.

Read more on elections:

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For many the biggest headwind for markets is the Fed’s monetary tightening with Thursday’s consumer-price-index data the next event risk coming on the heels of core consumer prices rising more than forecast to a 40-year high in September. Even if prices begin to moderate, the CPI is far above the Fed’s comfort zone.

Going forward there may be a silver lining in gridlock for policy makers, according to Art Hogan, chief market strategist at B. Riley Wealth.

“Divided government, particularly leading into a presidential election, will most likely create a standstill where very little gets done,” Hogan wrote. “That’s probably a good thing for the Fed because various stimuli have not made their work easier.”

More commentary

• “The more and more you just get polls or even some slight acknowledgements from places that the Republicans are probably going to take up at least one chamber of Congress, I think the market is actually seeing that as a good outcome,” Shawn Cruz, head 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 the cycle so if you have the Fed chasing down lagging indicators with a very rapid succession of interest rate increases and quantitative tightening, there is a very significant risk that the Fed significantly overshoots neutral.”

• “The gridlock rally is a bit overdone, as we were already there,” said Victoria Greene, G Squared Private Wealth CIO. “Investors will need to temper expectations on results coming in this evening. Many contested races it might be weeks, or god forbid, months before we know results. Politics matters personally, less so to the markets.”

Treasuries gained across the board Tuesday, with the benchmark 10-year rate dropping as much as 8 basis points. Meanwhile, traders shaved bets on rate hikes, with swap markets still leaning toward a 50 basis-point Fed hike in December.

Nvidia Corp. climbed as it began producing a processor for China. Take-Two Interactive Software Inc. fell after reducing its forecast for net bookings.

Europe’s Stoxx 600 rallied, after a weak open. Chinese equities halted a rally as traders considered a jump in virus infections and official comments defending Covid Zero.

Key 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 mortgage applications, Wednesday

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

• US CPI, US initial jobless claims, Thursday

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

• US University of Michigan consumer sentiment, Friday

Some of the main moves in markets:

Stocks

• The S&P 500 fell 0.5% as of 2:32 p.m. New York time

• The Nasdaq 100 fell 0.7%

• The Dow Jones Industrial Average was little changed

• The MSCI World index was little changed

Currencies

• The Bloomberg Dollar Spot Index fell 0.2%

• The euro rose 0.3% to $1.0055

• The British pound was little changed at $1.1513

• The Japanese yen rose 0.6% to 145.71 per dollar

Cryptocurrencies

• Bitcoin fell 16% to $17,424.02

• Ether fell 21% to $1,252.48

Bonds

• The yield on 10-year Treasuries declined eight basis points to 4.14%

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

• Britain’s 10-year yield declined nine basis points to 3.55%

Commodities

• West Texas Intermediate crude fell 3.3% to $88.78 a barrel

• Gold futures rose 2% to $1,714.70 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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