US stocks fall as crypto raises risk sentiment: Markets fold

(Bloomberg) — U.S. stocks fell in choppy trading amid sharp declines in some risk assets and as investors turned broadly cautious ahead of midterm election results. Bond yields fell and the dollar pared losses.

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Both the S&P 500 and the tech-heavy Nasdaq 100 fell into the red. The sudden drop in stocks coincided with Bitcoin’s fall which shook market sentiment. The yield on two-year bonds, more sensitive to changes in Federal Reserve policy, fell 4 basis points, while a dollar index fell.

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

The withdrawal comes as investors eye a possible deadlock from the midterm elections. However, any final outcome may not be known for days or even weeks if the races are as close as polls suggest and if the losers contest the results.

The history of strong performance following the mid-term results has helped bolster optimism about the outlook for equity markets. While polls show that Republicans could win, thus putting a check on Democratic policies, 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.

Read more about the elections:

Latest Election: Florida Rejects Federal Election Supervisors

America’s Votes Deeply Divided Amid Inflation Fears, Culture Wars

Here are key races to watch hour-by-hour as midterm voting closes

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

Going forward, there may be an impasse for policymakers, according to Art Hogan, chief market strategist at B. Riley Wealth.

“Divided government, especially leading into a presidential election, will likely 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.”

More comments

  • “As you get more and more polls or even some small confirmations from places that the Republicans are probably going to take at least one chamber of Congress, I think the market is actually seeing that as a good outcome,” said Shawn Cruz, chief. TD Ameritrade’s trading strategist said in an interview. “They actually want a little deadlock from Washington.”

  • “Inflation statistics will be more important than the election,” Michael Darda, chief economist at MKM Partners, told Bloomberg TV. “Inflation will tend to lag the cycle, so if the Fed chases the lagging indicators with a very rapid succession of rate hikes and quantitative tightening, there is a very significant risk that the Fed will significantly exceed neutral.”

  • “The dead-end rally is a bit of an exaggeration, as we’ve already been there,” said Victoria Greene, G Squared Private Wealth CIO. “Investors should temper expectations for tonight’s results. Many contested races can take weeks, or god forbid, months before we know the results. Politics matters personally, less so for markets.”

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

Nvidia Corp. rose as it began to produce a processor for China. Take-Two Interactive Software Inc. retreated after cutting its forecast for net bookings.

Europe’s Stoxx 600 rallied after a weak open. Chinese stocks halted a rally as traders weighed a jump in virus infections and official comments in defense of Covid Zero.

Key events this week:

  • US midterm elections, Tuesday

  • BEI oil inventory report, Wednesday

  • China Aggregate Finance, CPI, CPI, Money Supply, New Yuan Loans, Wednesday

  • US Wholesale Stocks 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 movements in the markets:

inventories

  • The S&P 500 was down 0.5% at 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

currency

  • The Bloomberg Dollar Spot index fell 0.2%

  • The euro rose 0.3% to $1.0055

  • The British pound eased slightly to $1.1513

  • The Japanese yen rose 0.6% to 145.71 yen per dollar

Cryptocurrencies

  • Bitcoin fell 16% to $17,424.02

  • Ether fell 21% to $1,252.48

Bindings

  • The 10-year bond yield fell eight basis points to 4.14%

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

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

Goods

  • 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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