Tuesday, December 7, 2021

V Is for Volatility

 

By Jeffrey Cane |  Wednesday, December 1

Swing, Swing, Swing. There has been an obvious pattern in the stock market in recent days. Alarm over the Omicron variant  is followed by a recognition that the reaction was overdone is followed by further alarm. Today, that pattern got compressed into a single session. 

Stocks started brightly, bouncing back after a slump yesterday that was set off by a worrying view of the variant and a hawkish turn by Federal Reserve Chairman Jerome Powell.  At one point earlier today, the S&P 500 was up as much as 1.9%. 

Then came news of a confirmed Omicron case in the U.S., that of a San Francisco resident who had recently returned from South Africa,  and stocks slid this afternoon. The S&P 500 ended down 1.2%, its sharpest one-day turnaround since April 7, 2020.

Combined with yesterday's decline, the index is down 3.1% over two days.  Today's selloff was broad, but not quite as broad as yesterday's. Utilities alone gained among the S&P 500's 11 sectors after not one did yesterday,  and 99 of the index's components ended in the green, up from just seven yesterday. 

The Dow Jones Industrial Average finished down 1.3%, and the Nasdaq Composite was off 1.8%. The Russell 2000 had a head-snapping round-trip today, up 2.5% earlier and closing down 2.3%. The small-cap index is now down 7.9% for the last four days and in correction territory.

The snapbacks probably should not have been surprising. "We've seen this movie before," wrote Edward Moya, a senior market analyst at Oanda, "and Wall Street will likely remain Covid-variant-headline driven until a clear assessment over this wave can be made."

Yet complicating efforts to gauge the market risks from the variant has been Powell's comments about a potentially faster pace for the Fed's unwinding and the prospect for interest rates coming sooner than expected as a result. The combination of Omicron and Powell may be exacerbating the volatility. 

"Some market participants likely were caught flatfooted by Powell’s Senate appearance," Steve Englander, head of global G-10 FX research at  Standard Chartered, wrote before the market open. "The emergence of Omicron risk had led some to believe that renewed downside economic risk had fattened the monetary policy tail on the dovish side." 

Speaking of volatility, the most popular gauge of that, the Cboe Market Volatility Index, or Vix, surged 14%, to over 31 today.

Among the sectors, cloud software stocks were weaker after Salesforce.com (down 11.8%) gave a mixed earnings outlook. Eric Savitz has more here. Travel stocks fell sharply. Square  is changing its name to Block. This, err,  Block trade was announced after the stock had fallen 6.7% on the day.

The Covid scare, and its possible impact on demand, weighed on energy prices. Crude oil futures fell 0.9%, to $65.57 a barrel. Traders will be watching tomorrow if OPEC and its allies give any indication of changing their production plans following the recent retreat in prices. 

The yield on the two-year Treasury note rose to 0.563%, while the 10-year yield was little changed at 1.433%.  Gold rose 0.5%, to $1781.60 an ounce. Bitcoin traded around $57,026 this afternoon.

 

 


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