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Dow erases 500 point rise as stock market rebound gives way

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A sharp rebound in U.S. stocks after three days of heavy losses was erased on Tuesday, with major indexes falling on the eve of a key inflation reading.

What is happening
  • The Dow Jones Industrial Average DJIA,
    -0.71%
    was down 73 points, or 0.2%, at 32,172. The Prime Gauge rose 506 points in its early session high.

  • The S&P 500 SPX,
    -0.40%
    was down 3 points, or 0.1%, at 3,988.

  • The Nasdaq Composite COMP,
    +0.08%
    was up 28 points, or 0.2%, at 11,655.

On Monday, the Dow Jones fell 654 points, or 2%, while the S&P 500 fell 3.2%, to close below the 4,000 mark and its lowest since March 31, 2021. The Nasdaq Composite fell 4.3% to its lowest since November 2020.

Over the past three days, the S&P 500 has fallen 7.2%, the biggest three-day drop since March 20, 2020, when the world was grappling with the coronavirus pandemic.

What drives the markets

The early rise may have given traders hope that a so-called Tuesday reversal could materialize. But those hopes were quickly dashed as the indices were unable to hold on to early gains.

Uncertainty surrounding the economic outlook as the Federal Reserve continues an aggressive cycle of rate hikes and other moves to rein in inflation at its highest in more than four decades has unsettled investors, analysts said.

Markets are clearly confused about what the Fed will do this year and how aggressive it will become. This can be seen in the volatility of expectations for the fed funds rate at the end of 2022, as seen in fed funds futures. And that’s reflected in equity market volatility, with the VIX above 30, Kristina Hooper, chief global market strategist at Invesco, said in a note.

The VIX is the Cboe Volatility Index VIX,
-2.24%
a measure of the expected volatility of the S&P 500 over the next 30 days, which is trading above its long-term average near 20.

On the contrary, corporate earnings news since Monday’s close has been negative, with sharp declines tied to earnings for companies including lending platform Upstart Holdings UPST,
-59.16%,
Groupon GRPN online marketplace,
-11.40%
and manufacturer of Plug Power PLUG fuel cells,
-7.61%.

To see: Upstart stocks could lose more than half their value as earnings highlight a perfect storm of headwinds

The broader issue facing the market is that the Federal Reserve will continue to tighten until it sees signs that inflation is under control, and there is no indication that it will be soon.

The only asset that benefits is the US dollar DXY,
+0.17%,
trading around two-decade highs, while GC00 gold,
-0.84%
holds its own riskier assets, including bitcoin BTCUSD,
+0.26%
clearance sale. The dollar’s recovery appeared to ease on Tuesday, as Treasury yields continued their decline from 3.5-year highs, with the 10-year note rate TMUBMUSD10Y,
2.951%
down more than 10 basis points to 2.974%.

There is one potential catalyst this week, which could possibly slow the market sell-off: US inflation data due on Wednesday. The consumer price index is expected to have fallen to 8.1% in April from 8.5% printed a month earlier. Lower inflation is the only thing that could give investors hope, said Ipek Ozkardeskaya, senior analyst at Swissquote Bank.

President Joe Biden is scheduled to speak at 11:30 a.m. Eastern Time, outlining his administration’s attempts to bring down inflation.

Companies in the spotlight
  • Shares of AMC Entertainment Holdings Inc. AMC,
    -6.39%
    fell 5.8% after the cinema chain operator and meme stock favorite produced a better-than-expected first quarter.

  • Peloton Interactive Inc. PTON,
    -14.15%
    Shares fell 14.3% after the connected exercise company failed to deliver its latest financial results and issued an upbeat outlook.

  • Shares of Novavax Inc. NVAX,
    -2.43%
    fell 5% after the biotech company reported a profitable first quarter, but not as much as Wall Street had expected, and its sales also fell below estimates.

  • Tesla Inc. TSLA,
    +0.29%
    suspended production at its Shanghai factory, this time due to supply issues, Reuters reported Monday evening. The shares edged up 0.3%.

  • Pfizer Inc. PFE,
    +0.51%
    announced on Tuesday that it has entered into a definitive agreement to acquire Biohaven Pharmaceutical Holding Company Ltd. BHVN,
    +70.71%
    for $11.6 billion in cash. Shares of Biohaven jumped 70%, while shares of Pfizer rose 1%.

other assets
  • Oil futures lost ground, with the US benchmark CL.1,
    -2.45%
    down 3% near $101 a barrel. GC00 gold futures,
    -0.84%
    fell 0.7% to trade below $1,845 an ounce.

  • The Stoxx Europe 600SXXP,
    +0.68%
    rose 1.3%, while London’s FTSE 100 UKX,
    +0.37%
    gained 0.8%.

  • The Shanghai Composite SHCOMP,
    +1.06%
    rose 1.1%, while the Hang Seng HSI index,
    -1.84%
    fell 1.8% and Japan’s Nikkei 225 NIK,
    -0.58%
    lost 0.6%.

Sources

1/ https://Google.com/

2/ https://www.marketwatch.com/story/u-s-stock-futures-climb-after-three-days-of-heavy-selling-11652174336

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