U.S. stocks fall 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,
  -1.30%
  was trading 416 points, or 1.2%, lower to reach 33,409, and had hit an intraday low at 33,291.33.

• The S&P 500
  SPX,
  -1.08%
  was down 38 points at 4,183, a slide of about 0.9%.

• The Nasdaq Composite Index
  COMP,
  -0.96%
  was trading 86 points lower, or 0.6%, near 14,076.

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 gain of less than 0.1%, potentially extending its four-week 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 rate setters at the Federal Reserve.

And just as investors may be 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 rates 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 as soon as 2023 has helped to yank 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 tech-related, growth areas, which can be sensitive to rising borrowing costs.

A correction in cyclical stocks is underway as China’s economy slows, U.S. fiscal hopes fade 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 6.1%, on pace for its worst week since June 12, 2020.

“Although long-term real yields have dropped back a bit after their initial surge, we expect them to rise again in due course,” wrote Thomas Mathews, market economist at Capital Economics, in a Friday research report.

Mathews is forecasting the S&P 500 index to 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.  

The day’s losses also were being led by declines in financials
XLF,
-2.33%,
down 2.1%, while consumer staples
XLP,
-1.17%,
energy
XLE,
-2.26%
and communication services
XLC,
-1.11%
were slumping by about 0.7% to 1%, at last check.

There will be 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 2.6%.

• Shares of Orphazyme A/S ORPH plummeted in premarket trading Friday, 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 48% Friday.

• Shares of Curevac CVAC were up 8.5%. 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 to 1.453%.

• The ICE U.S. Dollar Index DXY, a measure of the currency against a basket of six major rivals, shot up 0.4% 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 traded off 0.1% at $1,773.50 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.