(Bloomberg) — Wall Street’s massive expiration of options not only left stock traders more cautious, it also drove one of the leaders of the bull market to a roller-coaster ride.
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About $5.5 trillion are estimated to expire Friday during the quarterly “triple witching” in which derivatives contracts tied to equities, index options and futures mature. This time around, Nvidia Corp. is playing an added role. The value of contracts tied to the chipmaker due Friday is the second-largest of any underlying asset, lagging only the S&P 500. The expiration coincides with index rebalancing by S&P Dow Jones Indices.
To Steve Sosnick at Interactive Brokers, the “key” rebalance will occur in the Technology Select Sector Index — which is the benchmark for the $80 billion XLK exchange-traded fund.
“Nvidia’s index weight will rise dramatically, mostly at the expense of Apple’s,” he noted. “Considering the outsized importance of megacap tech stocks overall — and Nvidia in particular — upon broad market indices, it is not unreasonable for traders to be wary about outsized movements late in the day.”
As the contracts disappear, investors will adjust their positions, adding a burst of volume capable of swinging individual holdings. The S&P 500’s trading volume was 45% above the past month average. Nvidia almost erased a plunge of about 5% before pushing lower again. Apple Inc. outperformed.
The S&P 500 fell to around 5,465. Nvidia lost about $200 billion in two days. Its market cap was about $3.1 trillion on Friday, lower than Apple at $3.2 trillion and Microsoft Corp. at $3.3 trillion.
Treasury 10-year yields were little changed at 4.25%. France’s risk premium over Germany closed at the highest since 2012.
The ongoing AI frenzy that briefly made Nvidia the world’s most-valuable company this week also drove record inflows into tech funds, said Bank of America Corp. strategists. About $8.7 billion flowed into tech funds in the week through June 19, according to a note from the bank citing EPFR Global data.
“The ‘all roads lead to Nvidia’ trade is once again bolstered” as Europe falters amid the political turmoil in France, strategist Michael Hartnett said. Still, while investors still feel they need more exposure to AI-related plays, “all asset allocators are concerned about the equity concentration risk.”
Keith Lerner at Truist Advisory Services says the firm is downgrading the technology sector to neutral after the industry largely outperformed the S&P 500 since their overweight call in November.
“Although we still have a favorable long-term view of technology, on a shorter-term basis the sector appears extended, and we would not be chasing the sector,” Lerner noted. “That said, the sector appears far from bubble territory, and we believe secular tailwinds will persist around artificial intelligence.”
Friday’s options event came at a critical juncture for markets positioning for the second half of 2024 and the Federal Reserve’s next steps. Data showed US services activity picked up early this month to the fastest pace in more than two years. Separately, sales of existing homes fell for a third straight month.
“Investors should brace for drama,” said Solita Marcelli at UBS Global Wealth Management. “The second half of 2024 is shaping up to be a time of transition and volatility. The decisions that investors make now will be key to navigating this period effectively.”
John Stoltzfus at Oppenheimer Asset Management says he remains positive in the outlook for stocks as prospects for improved fundamentals this year show potential to be realized.
“That said, history shows us that stocks and other asset class prices don’t go up in a straight line but rather tend to climb the proverbial “wall of worry,” requiring prudent diversification, patience, and a sense of one’s tolerance to risk and fluctuation for private investors and discipline tied to an institution’s mandate for professional investors,” he noted.
Corporate Highlights:
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Apple Inc. is withholding a raft of new technologies from hundreds of millions of consumers in the European Union, citing concerns posed by the bloc’s regulatory attempts to rein in Big Tech.
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Airbus SE is edging closer to an agreement with Spirit AeroSystems Holdings Inc. to take over parts of the aerospace supplier’s business, paving the way for an acquisition of the bulk of the company by arch-rival Boeing Co. as early as next week.
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American Airlines Group Inc. is suspending training for new pilots through the end of this year, the latest pullback by a major US carrier in the face of uneven travel demand and delayed aircraft.
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A top US Food and Drug Administration official overrode reviewers to give broad approval to Sarepta Therapeutics Inc.’s gene therapy for a rare muscle disease in children, despite a lack of data showing it actually slows overall progression of the disease.
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Carlsberg AS said it’s weighing its options after Britvic Plc rejected unsolicited takeover bids that valued the UK soft-drink maker at as much as £3.1 billion ($3.9 billion).
Some of the main moves in markets:
Stocks
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The S&P 500 fell 0.1% as of 3:44 p.m. New York time
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The Nasdaq 100 fell 0.1%
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The Dow Jones Industrial Average was little changed
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The MSCI World Index fell 0.3%
Currencies
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The Bloomberg Dollar Spot Index was little changed
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The euro was little changed at $1.0694
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The British pound was little changed at $1.2649
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The Japanese yen fell 0.4% to 159.54 per dollar
Cryptocurrencies
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Bitcoin fell 1.5% to $64,088.96
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Ether was little changed at $3,526.4
Bonds
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The yield on 10-year Treasuries was little changed at 4.25%
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Germany’s 10-year yield declined two basis points to 2.41%
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Britain’s 10-year yield advanced three basis points to 4.08%
Commodities
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West Texas Intermediate crude fell 0.8% to $80.66 a barrel
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Spot gold fell 1.6% to $2,322.25 an ounce
This story was produced with the assistance of Bloomberg Automation.
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