Washington: 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.
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.
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."
