U.S. stocks sharply lower on ‘quad witching’ Friday, as investors focus on Bullard’s hawkish comments

The U.S. government is closed on Friday after President Joseph Biden signed a bill Thursday making Juneteenth a national holiday commemorating the end of slavery in the U.S. However, the stock and bond markets remain open for business.

How are stock benchmarks trading?

• The Dow Jones Industrial Average DJIA, -1.27% was trading 429 points, or 1.3%, lower to reach 33,395, and had hit an intraday low at 33,291.33.
• The S&P 500 SPX, -0.96% was down almost 43 points at 4,179, a slide of about 1%.
• The Nasdaq Composite Index COMP, -0.71% was trading 120 points lower, or 0.9%, near 14,041.

On Thursday, the Dow closed down 210.22 points, or 0.6%, at 33,823.45, marking a four-day skid, its longest since January. The S&P 500 edged down 1.84 points, or less than 0.1%, to 4,221.86. The Nasdaq Composite gained 121.67 points, or 0.9%, to 14,161.35.

Weekly statistics

For the week, the Dow is set to mark a weekly decline of about 3.2%, its second weekly fall in a row and its steepest such drop since Jan. 29. The Nasdaq was heading for a weekly loss of 0.2%, potentially snapping its winning streak. The S&P 500 is down 1.6% for the week thus far, on track to end a three-week win streak.

What’s driving the market?

Blame it on quadruple witching or James Bullard as the market took a leg lower, rounding out a downbeat week where investors looked for guidance from interest rate setters at the Federal Reserve.

Just as investors were girding themselves for a Fed with perhaps less of an inclination to champion easy-money policies, St. Louis Federal Reserve President Bullard offered a fresh dose of hawkishness, saying Friday that he thinks the Fed should lift its benchmark interest rate as early as late 2022.

In an interview on CNBC, Bullard said it was “natural” for the Fed to tilt hawkish at its meeting earlier this week, given recent strong inflation readings, but he also pointed to an economy that he views as recovering strongly from the COVID pandemic.

Bullard also said he was “leaning” toward supporting an end to the purchases of mortgage backed securities, given the “booming housing market” and concerns around potential bubbles in the sector. “I would be a little concerned about feeding into the housing froth that seems to be developing,” Bullard said.

Bullard’s comments followed statements earlier in the week from the Federal Open Market Committee and remarks by Fed Chairman Jerome Powell, which were viewed as setting the stage for a less accommodative stance by the central bank. Fed policy makers penciled in two rate increases by the end of 2023 and discussed the eventual tapering of the central bank’s asset buying program. 

Growing expectations that the U.S. central bank will raise interest rates in 2023 has helped to pull equities down from record highs touched earlier this week by the S&P 500 and the Nasdaq Composite.

The Nasdaq Composite has remained relatively buoyant, however, as a pullback in Treasury yields also encouraged buying in technology and growth stocks whose valuations are sensitive to rising bond yields.

A correction in cyclical stocks is underway as China’s economy slows, U.S. fiscal stimulus fades and the Fed becomes more hawkish, according to a BofA Global Research report dated June 17. That creates “a perfect summer storm for necessary correction in cyclicals, bulls rotating to tech,” BofA’s investment strategists wrote.

“We’re definitely seeing people go back into growth,” said Matthew Tuttle, chief executive officer and chief investment officer of Tuttle Capital Management, in a phone interview Friday. “I don’t think that’s the long-term play. I still believe in the reopening trade.” 

Moves in longer-dated bonds have been pegged to some position unwinding as short-term yields rose and long-term yields fell, but some analysts wager that yields will eventually climb in response to a Fed that appears to be preparing the market for higher inflation and higher interest rates.

The flattening of the U.S. Treasury yield curve also contributed to a sharp fall in bank stocks this week, with the S&P500 financial sector down about 6%, on pace for its worst week since June 12, 2020.

Meanwhile, Matt Peron, director of research at Janus Henderson, told MarketWatch Friday that believes the reflation trade still has “gas in the tank,” even if it pauses over the summer. The recent rotation into growth stocks may be a belief among some investors that peak inflation has passed, as well as the stock market’s reaction this week to a still highly-accommodative Fed moving closer toward tightening its monetary policy. “It’s tightening tempest in a teapot,” said Peron.

Thomas Mathews, market economist at Capital Economics, is forecasting the S&P 500 index will pare its gains over the coming six months and sees muted returns in the 2022 and 2023, amid a higher interest-rate regime. “This would represent an annualized increase of ~4% from its current level, compared with ~13% in the past decade,” he forecast in a research note Friday.

The day’s losses also were being led by declines in financials XLF, -2.23%, down 2.1%, while consumer staples XLP, -1.21%, energy XLE, -2.41% and communication services XLC, -0.93% were slumping by about 0.7% to 1%, at last check.

There was no U.S. economic data Friday as the government observes the Juneteenth holiday.

Which companies are in focus?

• Sykes Enterprises Inc. SYKE shares soared 29.7% after the company announced an agreement Friday to be acquired by Sitel Group in a cash deal for the customer experience management services valued at $2.2 billion.
• Moderna Inc. MRNA said Friday it remains committed to creating jobs in Massachusetts and will hire at least 155 more people for high-tech manufacturing roles this year. Shares were down 3%.
• Shares of Orphazyme A/S ORPH plummeted after the Denmark-based biopharmaceutical company said overnight that it received a “Complete Response Letter” (CRL) from the U.S. Food and Drug Administration regarding its treatment for Niemann-Pick disease type C (NPC). U.S. listed shares were down almost 49% Friday.
• Shares of Curevac CVAC were up 6.3%. Shares of the German biotech have lost 22% this week after the company said a late-stage clinical trial of its COVID-19 vaccine was only 47% effective.

How are other assets faring?

• The yield on the 10-year Treasury note TMUBMUSD10Y slid 6 basis points to 1.449%.
• The ICE U.S. Dollar Index DXY, a measure of the currency against a basket of six major rivals, shot up 0.3% and has climbed 1.8% for the week, its sharpest weekly gain since the week of April 3, 2020.
• Oil futures CL00 traded higher, with West Texas Intermediate crude for July delivery up 0.8% at $71.62 a barrel. Gold futures GC00 ended with a loss Friday, settling 0.3% lower at $1,769 an ounce.
• European equities slumped, with the pan-Continental Stoxx Europe 600 SXXP closing 1.6% lower for a 1.2% loss this week. London’s FTSE 100 UKX fell 1.9% Friday, booking a weekly loss of 1.6%.
• In Asia, the Shanghai Composite SHCOMP closed flat, Hong Kong’s Hang Seng Index HSI ended 0.9% higher and Japan’s Nikkei 225 NIK shed 0.2%, on the day.