Dow jumps almost 750 points as stocks end higher, bond yields fall after reports Fed may shift to smaller rate hikes after November

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US stocks closed sharply higher on Friday as investors weighed in on a Wall Street Journal story and comments from Federal Reserve officials suggesting the central bank may raise smaller interest rates after its November meeting.

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According to Goldman Sachs, investors were also facing intraday volatility in the stock, as the estimated value of options for stocks, indexes and exchange-traded funds of about $2 trillion expired, or were due to expire, on Friday. .

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For the week, the Dow rose 4.9%, the S&P 500 4.7% and the Nasdaq 5.2%. All three indexes posted their biggest weekly percentage gains since June, according to Dow Jones market data.

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US stocks jumped on Friday as investors believed Wall Street Journal reportWith comments from San Francisco Fed Chair Mary Daly suggesting that the Federal Reserve could potentially begin to back down a bit from its aggressive pace of raising interest rates later this year,

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Mona Mahajan, senior investment strategist at Edwards Jones, said on the phone Friday: “We’re starting to hear some rumblings that the Fed may at least play down the aggressive nature of rate hikes.” The market was pricing “very strongly” in December as well as a 75-basis point increase in the following month, she said.

While the US central bank is set to raise its benchmark rate again to three-quarters of a percentage point at its policy meeting in early November, there could be some debate among Fed officials over a 50 basis points hike in rates in December.

“This is the first step in what we call the beginning of the end,” said Mahajan. “Over time we expect the pace of rate hikes to slow down,” followed by a pause at some point, and then an assessment of inflation and the economy, she said.

According to the CME, fed funds futures traders on Friday lowered the prospect of a 75 basis-point increase in December, with a decline of less than 50% from 75% before the report. Fedwatch Tool.

Meanwhile, the Treasury yield took a break from its recent climb, which helped take some pressure off the stock. Yield on Two Year Treasury Note TMUBMUSD02Y,
fell 11.9 basis points to 4.489% on Friday, while the 10-year yield TMUBMUSD10Y,
According to Dow Jones market data, it fell a little more than a basis point to 4.212%.

The ten-year and two-year yields “have risen dramatically over the past few days,” said Anthony Saglimbin, chief market strategist at Ameriprise Financial, in a phone interview on Friday. He worries that the stock market’s strong rally on Friday “could stomp the perception that the Fed could stop” raising its rates.

All three major US stock benchmarks posted their biggest weekly percentage gains since June as investors continued to assess the companies’ earnings results from the third quarter. The Dow Jones Industrial Average gained 4.9%, the S&P 500 4.7% and the Nasdaq Composite up 5.2%.

“Keep in mind that despite some one-sided stories, we have made decent money throughout the week,” Mahajan said.

About 20% of the companies in the S&P 500 index have reported earnings for the third quarter, according to a Friday report by Jon Butters, a senior earnings analyst at FactSet. Their note shows that 72% of the S&P 500 companies reported a “positive” surprise in terms of earnings per share.

But Snap Inc. snap shares,
fell on Friday after disappointing reports.

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Investors were also watching the options market.

A team of options strategists at Goldman Sachs Group said in a note to clients that open interest in options linked to major equity indexes and exchange-traded funds tracking those indexes increased this year, while interest in single-stock options increased. has decreased.

This left the market vulnerable to major intraday swings on Friday as options dealers scrambled to hedge their exposure to options trading at the close of the money.

“If market makers or other options traders who delta-hedge their positions are net longs” [at the money] Options, expiration-related flows may have the effect of lowering stock prices,” the team said in a note to clients.

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