Stocks Churn In Final Minutes Of Big Options Day: Markets Wrap

(Bloomberg) -- A rally in US stocks lost traction as the euphoria following the Federal Reserve’s half-point interest rate cut faded while expiring derivatives contracts and a big rebalancing magnified Friday’s moves.

After wavering between gains and losses in the final minutes of trading, the S&P 500 and Nasdaq 100 both ended the session down 0.2% with the broader benchmark fresh off its 39th record high of 2024. The blue-chip Dow Jones Industrial Average eked out a 0.1% gain — enough for a closing record. More than 20 billion shares changed hands on US exchanges, the busiest session since January 2021. 

Friday’s quarterly “triple witching” saw about $5.1 trillion derivatives contracts tied to stocks, index options and futures mature, according to an estimate from derivatives analytical firm Asym 500. At the same time another $250 billion in index trades were being digested. The event has a reputation for causing sudden price moves as traders roll over their existing positions or start new ones.

While US equities were able to extend a rally into its second consecutive week, a handful of disappointing earnings reports weighed. FedEx Corp. plunged 15% after the economic bellwether missed profit estimates and cautioned that its business would slow. Lennar Corp. slipped after quarterly home orders fell short of Wall Street expectations.

Intel Corp. was among the session’s advancers after a report of a Qualcomm Inc. takeover approach while Constellation Energy Corp., the biggest US operator of reactors, closed at a record on plans to put Three Mile Island back into service.

Confidence has been growing that the central bank will be able to engineer a soft landing, but warnings such as the one from FedEx underscore lingering concerns. Fed policymakers have projected a further half point of reductions this year.

“A sustained melt-up in risk is unlikely into peak election uncertainty that may generate a soft patch in the data,” Evercore ISI’s Krishna Guha wrote. “Investors should view the gains in risk post-Fed as a down payment, with a check in the mail for the balance after election day.”

Evercore ISI’s vice chairman sees another half-point cut as possible if labor or inflation data come in weak. Gold set an all-time high as traders contemplated more policy easing from the central bank.

Traders also picked at the differing views on consumer purchasing power offered by Fed Governors Christopher Waller and Michelle Bowman. Waller told CNBC it was favorable inflation data that convinced him to support the Fed’s decision for a half percentage point interest-rate cut this week. Bowman, the lone dissenting voice against the jumbo rate cut, said the move was declaring victory over inflation too early.

Meanwhile, JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon registered his doubts that the world’s largest economy can straddle slowing growth without tipping into a recession.

“I hope it’s true,” he said at an event. “But I’m also more skeptical that inflation is going to go away so easily, not because it hasn’t come down — it has — and it can come down more.”

Gold traded above $2,600 an ounce, extending gains after an Israeli strike on a Beirut suburb. A gauge of dollar strength edged higher while Treasuries were mixed. 

For Bank of America Corp.’s Michael Hartnett, the optimism in equity markets following the Fed’s move is stoking the risk of a bubble, making bonds and gold an attractive hedge against any recession or renewed inflation.

The strategist said stocks are now pricing in more Fed easing and about 18% earnings growth for the S&P 500 by end-2025. It doesn’t “get much better than that for risk, so investors are forced to chase” the rally, Hartnett wrote in a note. 

He also said stocks outside the US and commodities were a good way to play a possible soft economic landing, with the latter being an inflation hedge. International equities are cheaper and starting to outperform US peers, according to Hartnett.

The yen slid after Governor Kazuo Ueda proved less hawkish than some traders expected. Ueda signaled little urgency to hike rates, and said that upside risks to inflation are easing.

Investors will get fresh data on PMI, GDP and the Fed’s preferred inflation gauge, PCE, next week. They will also hear from a number of policymakers including Fed Presidents Raphael Bostic and Austan Goolsbee.