Dow drops 300 points as options expiration unleashes volatility in stocks

U.S. stocks traded lower on Friday as more than $2 trillion in stock-linked options expired, as investors digested more hawkish comments from the Federal Reserve.

How are stock index futures traded?
  • The Dow Jones Industrial Average DJIA,
    -0.78%
    fell 302.06 points, or 0.9%, to 33,695.

  • The S&P 500 SPX,
    -1.20%
    fell 57 points, or 1.4%, to 4,226.

  • The Nasdaq Composite fell 264 points, or 2%, to 12,701.

On Thursdaythe S&P 500 SPX,
-1.20%
rose 0.2% to 4,283.74, the Dow Industrials DJIA,
-0.78%
rose less than 0.1% to close at 33,999.04 and the Nasdaq Composite COMP,
-1.92%
gained 0.2% to end at 12,965.34.

What drives the markets?

Friday is devoid of major economic data from the United States, leaving investors to contend with the monthly expiration of more than $2 trillion in stock and index options and comments from Federal Reserve officials.

See: The stock market rally faces a major challenge to the S&P 500’s 200-day moving average

Treasury yields climbed on Friday as investors returned to the idea that the Fed’s steep interest rate hikes were not over, with the 10-year yield TMUBMUSD10Y,
2.983%
up 11 basis points to 2.987% and the two-year TMUBMUSD02Y,
3.250%
up 4.3 basis points to 3.254%.

Interest-rate-sensitive tech stocks looked poised to bear the brunt, with the Nasdaq leading the market lower. The tech-heavy index was heading for a weekly decline of 0.6%, while the S&P 500 clings to positive territory, after both indexes ended last week with a fourth straight win, their most long weekly streak since November 2021.

Meanwhile, investors are also pricing in the growing likelihood of the Federal Reserve raising interest rates by 75 basis points at its September meeting.

St. Louis Fed Chairman James Bullard told Wall Street Johurn Thursday that it would “lean toward” a 75 basis point hike in September. Investors also heard more cautious comments from Kansas City Fed President Esther George, who said the speed at which the increases will occur remains up for debate.

Speaking on Friday morning, Richmond Fed Chairman Tom Barkin said that while the Fed “will do what it takes” to bring inflation back towards its 2% target, “the return to normal will not does not require a calamitous fall in economic activity”. Bloomberg reported.

Opinion: The Fed Isn’t Cool About Fighting Inflation, So Stop Misreading Its Minutes

Now that U.S. retailers have finished reporting second-quarter earnings, investors are focused on what Fed Chairman Jerome Powell will say at the Fed’s annual economic symposium in Jackson Hole, Wyo, next week.

“I think everyone is just waiting for Jackson Hole, so I think there will be a lot of speculation about what Powell is going to say over the next five days,” said Brad Conger, deputy chief investment officer at Hirtle Callaghan & based in Pennsylvania. Co., which oversees approximately $20 billion in assets, primarily on behalf of university endowments.

The picture of US economic data this week was mixed, with retail sales flat, while Wall Street received disappointing results from Target TGT,
-2.48%
and KSS from Kohl,
-3.53%.
But data on Thursday showed weekly jobless claims fell by 2,000 to 250,000, with no signs of mass layoffs.

Which companies are targeted?
  • Bed, Bath and Beyond Inc.
    BBBY,
    -37.64%
    shares fell 41.2% after investor Ryan Cohen confirmed that he had sold his entire stake in the retailerand made a profit of over $58 million.

  • Shares of Deere & Co.
    OF,
    -0.72%
    fell 2.3% after the tractor maker reported fiscal third-quarter profit that missed expectationsdue to higher costs and production inefficiencies, but its revenues exceeded forecasts.

  • Shares of Foot Locker Inc.. FL,
    +22.36%
    rose 20% before the market opened on Friday, boosted by the sneaker retailer’s second quarter results.

  • Shares of Weber inc.
    WEBR,
    -11.20%
    fell on Friday after topping $10 a share a day earlier for the first time since June.

How are other assets trading?
  • Crude prices fell in line with stock futures. CL.1 crude West Texas Intermediate,
    +1.60%
    for September fell 22 cents, or 0.3%, to $90.34 a barrel, while Brent BRN00,
    +1.17%
    was slightly lower at $96.53 a barrel.

  • The DXY US dollar index,
    +0.55%
    climbed 0.6% to 108.2 as investors sought safe-haven assets.

  • Gold prices fell, with December futures on the precious metal GCZ22,
    -0.42%
    falling $9, or 0.5%, to $1,762.50 an ounce.

  • BitcoinBTC USD,
    -8.45%
    fell 8.2% to $21,337 and was headed for what could be the biggest loss in two months.

  • Nikkei 225 NIY00 from Japan,
    -1.12%
    ended slightly lower at 28,930.33 on Friday, while the Hong Kong HSI Hang Seng Index,
    +0.05%
    gained 0.1% to 19,773.03. The Euro Stoxx 600 FXXP00,
    -0.64%
    fell 0.8%, while the UK’s FTSE 100 UKX,
    +0.11%
    advanced by 0.1%.

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