(Bloomberg) — US stocks swung into positive territory in volatile trading as investors await midterm election results and monitor the selloff in crypto tokens that has wiped out more than 10% from the price of Bitcoin. Treasury yields fell and the dollar trimmed losses.
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The S&P 500 churned higher with just over an hour to go in the cash session after earlier wiping out gains that had topped 1%. Sentiment was dented after Bitcoin plunged as the owner of the largest crypto exchange swooped in to buy a smaller rival that ran into liquidity trouble. The yield on two-year Treasuries, more sensitive to Federal Reserve policy changes, shed 6 basis points, while a gauge of the dollar pared declines.
The pullback comes as investors eye potential gridlock from midterm elections. Still, any final outcome may not be known for days or even weeks if races are as close as polls suggest and if losers challenge results.
In an unexpected development, billionaire Changpeng “CZ” Zhao consolidated his position atop the crypto world on Tuesday with a move to take over FTX.com. Terms of the emergency buyout were scant, helping to send prices of cryptocurrencies tumbling after a brief rebound.
“The mini crash in Bitcoin/crypto did destabilize the stock market and cause a sharp drop,” Jay Hatfield of Infrastructure Capital said of the sudden takeover of the FTX by Binance Holdings. “Investors don’t like to see any disruptions or mini crashes in any risk asset.
A history of robust performance following midterm results has helped buoy optimism about the outlook for equity markets. While polls suggest Republicans could make gains, thereby placing a check on Democratic policies, there are multiple scenarios. The best outcome for Treasuries could be a Republican control of both the House of Representatives and Senate, while the dollar could find support should Democrats keep both chambers.
Read more on elections:
Elections Latest: Florida Rejects Federal Election Monitors
Deeply Divided America Votes Amid Inflation Fears, Culture Wars
Here Are Key Races to Watch Hour by Hour as Midterm Voting Ends
For many the biggest headwind for markets is the Fed’s monetary tightening with Thursday’s consumer-price-index data the next event risk coming on the heels of core consumer prices rising more than forecast to a 40-year high in September. Even if prices begin to moderate, the CPI is far above the Fed’s comfort zone.
Going forward there may be a silver lining in gridlock for policy makers, according to Art Hogan, chief market strategist at B. Riley Wealth.
“Divided government, particularly leading into a presidential election, will most likely create a standstill where very little gets done,” Hogan wrote. “That’s probably a good thing for the Fed because various stimuli have not made their work easier.”
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“The more and more you just get polls or even some slight acknowledgements from places that the Republicans are probably going to take up at least one chamber of Congress, I think the market is actually seeing that as a good outcome,” Shawn Cruz, head trading strategist at TD Ameritrade, said in an interview. “They actually want a little bit of gridlock out of Washington.”
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“The inflation statistics are going to be more important than the election,” Michael Darda, chief economist at MKM Partners, said on Bloomberg TV. “Inflation will tend to lag the cycle so if you have the Fed chasing down lagging indicators with a very rapid succession of interest rate increases and quantitative tightening, there is a very significant risk that the Fed significantly overshoots neutral.”
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“The gridlock rally is a bit overdone, as we were already there,” said Victoria Greene, G Squared Private Wealth CIO. “Investors will need to temper expectations on results coming in this evening. Many contested races it might be weeks, or god forbid, months before we know results. Politics matters personally, less so to the markets.”
Treasuries gained across the board Tuesday, with the benchmark 10-year rate dropping as much as 9 basis points. Meanwhile, traders shaved bets on rate hikes, with swap markets still leaning toward a 50 basis-point Fed hike in December.
Nvidia Corp. climbed as it began producing a processor for China. Take-Two Interactive Software Inc. fell after reducing its forecast for net bookings.
Europe’s Stoxx 600 rallied, after a weak open. Chinese equities halted a rally as traders considered a jump in virus infections and official comments defending Covid Zero.
Key events this week:
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US midterm elections, Tuesday
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EIA oil inventory report, Wednesday
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China aggregate financing, PPI, CPI, money supply, new yuan loans, Wednesday
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US wholesale inventories, MBA mortgage applications, Wednesday
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Fed officials John Williams, Tom Barkin speak at events, Wednesday
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US CPI, US initial jobless claims, Thursday
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Fed officials Lorie Logan, Esther George, Loretta Mester speak at events, Thursday
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US University of Michigan consumer sentiment, Friday
Some of the main moves in markets:
Stocks
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The S&P 500 rose 0.3% as of 2:55 p.m. New York time
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The Nasdaq 100 rose 0.2%
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The Dow Jones Industrial Average rose 0.8%
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The MSCI World index rose 0.6%
Currencies
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The Bloomberg Dollar Spot Index fell 0.4%
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The euro rose 0.5% to $1.0075
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The British pound rose 0.2% to $1.1540
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The Japanese yen rose 0.8% to 145.49 per dollar
Cryptocurrencies
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Bitcoin fell 12% to $18,293.66
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Ether fell 16% to $1,319.85
Bonds
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The yield on 10-year Treasuries declined nine basis points to 4.12%
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Germany’s 10-year yield declined six basis points to 2.28%
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Britain’s 10-year yield declined nine basis points to 3.55%
Commodities
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West Texas Intermediate crude fell 2.9% to $89.10 a barrel
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Gold futures rose 2% to $1,714.50 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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