Dow falls 300 points as option expirations unleash volatility in stocks

U.S. stocks traded lower on Friday as more than $2 trillion in stock-related options expired as investors digested more hawkish comments from the Federal Reserve.

How is stock index futures traded?
  • Dow Jones Industrial Average DJIA,
    fell 302.06 points, or 0.9%, to 33,695.

  • S&P 500 SPX,
    fell 57 points, or 1[ads1].4%, to 4,226.

  • The Nasdaq Composite fell 264 points, or 2%, to 12,701.

On Thursday, the S&P 500 SPX,
rose 0.2% to 4,283.74, the Dow industrials DJIA,
rose less than 0.1% to close at 33,999.04 and the Nasdaq Composite COMP,
rose 0.2% to end at 12,965.34.

What drives the markets?

Friday is devoid of major U.S. economic data, leaving investors to deal with the monthly expiration of $2 trillion worth of stock and index options and comments from Federal Reserve officials.

See: Stock rally faces key challenge at S&P 500’s 200-day moving average

Treasury yields climbed on Friday as investors returned to the view that big Fed rate hikes were not over, with the 10-year yield TMUBMUSD10Y,
up 11 basis points to 2.987% and the two-year TMUBMUSD02Y,
up 4.3 basis points to 3.254%.

Interest-rate-sensitive tech stocks appeared poised to take the brunt, with the Nasdaq leading the market lower. The tech-heavy index was headed for a 0.6% weekly drop, while the S&P 500 is clinging to positive territory, after both indexes ended last week with a fourth straight win, their longest weekly streak since November 2021.

Meanwhile, investors are also weighing the growing likelihood that the Federal Reserve will raise interest rates by 75 basis points at its September meeting.

St. Louis Fed President James Bullard told The Wall Street Journal on Thursday that he would be “leaning toward” a 75 basis point hike in September. Investors also heard more cautious comments from Kansas City Fed President Esther George, who said how quickly hikes will happen remains up for debate.

In a speech Friday morning, Richmond Fed President Tom Barkin said that while the Fed “will do what it takes” to drive inflation back toward the 2% target, “it does not require a catastrophic drop in economic activity to return to the norm”, Bloomberg reported.

Opinion: The Fed doesn’t get cold feet when it comes to beating inflation to the ground, so stop misreading the minutes

Now that US dealers have finished reporting second-quarter earnings, investors are shifting their focus to what Fed Chairman Jerome Powell will say at the Fed’s annual economic symposium in Jackson Hole, Wyo. next week.

“I think everybody is just waiting for Jackson Hole, so I think there will be a lot of speculation about what Powell is going to say in the next five days,” said Brad Conger, deputy managing director of investments at Pennsylvania-based Hirtle Callaghan & Co., which oversees with about $20 billion in assets, mostly on behalf of university endowments.

The US economic data picture this week was mixed, as retail sales were flat, while Wall Street got disappointing results from Target TGT,
and Kohl’s KSS,
But Thursday brought data showing weekly jobless claims falling 2,000 to 250,000, with no sign of mass layoffs.

Which companies are in focus?
  • Bed, Bath & Beyond Inc.
    shares fell 41.2% after investor Ryan Cohen confirmed he sold his entire stake in the retailer, making a profit of more than $58 million.

  • Shares of Deere & Co.
    fell 2.3% after the tractor maker reported a third-quarter financial profit that missed expectations, due to higher costs and production inefficiencies, but revenue beat forecasts.

  • Shares of Foot Locker Inc. FL,
    rose 20% before the market opened on Friday, boosted by the sneaker retailer’s second-quarter results.

  • Shares of Weber Inc.
    fell on Friday after rising above $10 a share a day earlier for the first time since June.

How is trading with other assets?
  • Crude oil prices fell in line with stock futures. West Texas Intermediate crude oil CL.1,
    for September fell 22 cents, or 0.3%, to $90.34 a barrel, while Brent BRN00,
    was marginally lower at $96.53 per barrel.

  • The US dollar index DXY,
    climbed 0.6% to 108.2 as investors sought to harbor assets.

  • Gold prices fell, with December futures for the precious metal GCZ22,
    down $9, or 0.5%, to $1,762.50 an ounce.

  • Bitcoin BTCUSD,
    fell 8.2% to $21,337 and was headed for what could be its biggest loss in two months.

  • Japanese Nikkei 225 NIY00,
    ended marginally lower at 28,930.33 on Friday, while Hong Kong’s Hang Seng Index HSI,
    rose 0.1% to 19,773.03. Euro Stoxx 600 FXXP00,
    fell 0.8%, while Britain’s FTSE 100 UKX,
    rose 0.1 percent.

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