Wall Street ends sharply lower after hawkish Bullard spooks investors

(Reuters) – The three main Wall Street indexes all finished sharply lower on Friday, after investors were spooked by hawkish interest rate comments by Federal Reserve official James Bullard.

The blue-chip Dow and the benchmark S&P 500, which started the week at record closing levels, slumped after Bullard, president of the St. Louis Federal Reserve, said he was among the seven officials who saw rate increases beginning next year to contain inflation.

Inflation, and how the U.S. central bank will tackle it as the country comes out of the pandemic, had been front-and-center of investors’ minds in the run-up to this week’s Fed policy meeting.

Therefore, since the Fed on Wednesday projected interest rate hikes would happen sooner than previously expected, and signaled it was reaching the point where it could begin talking about tapering its massive stimulus – as opposed to just thinking about it – Wall Street’s main indexes have struggled.

“I’m not surprised to see the market sell off a little bit. I’m never surprised, given the strong run we’ve had for such a long period of time, when you see some periods of profit-taking,” said Tim Ghriskey, chief investment strategist at Inverness Counsel in New York.

Bullard’s comments spiked the CBOE volatility index, Wall Street’s fear gauge, which initially hit its highest level since May 21, before dropping back a touch.

“Next week, you will have various Fed governors give speeches, and we’ll have the same thing: some governors will be more hawkish, and some will be more dovish, so you’ll see some back-and-forth,” Ghriskey added.

Unofficially, the Dow Jones Industrial Average fell 534.22 points, or 1.58%, to 33,289.23, the S&P 500 lost 56.07 points, or 1.33%, to 4,165.79 and the Nasdaq Composite dropped 131.66 points, or 0.93%, to 14,029.69.

Other market ramifications from Bullard’s comments have included further strengthening of the U.S. dollar. The index which tracks the greenback against six major currencies jumped to its highest level since mid-April, and is on pace for its largest weekly gain in about 14 months.

While U.S. crude prices – which traditionally suffer from a strong dollar – initially fell on Friday, they rebounded after OPEC sources said the producer group expected limited U.S. oil output growth this year. [O/R]

The upward commodity move didn’t translate into positive sentiment for U.S. energy stocks, with the sector’s index joining financials as the worst performers.

Friday was also “quadruple witching day,” the quarterly simultaneous expiration of U.S. options and futures contracts which bring about increased trading volume at the market close.

It was the largest options expiration in history, noted Randy Frederick, vice president of trading and derivatives for Charles Schwab.

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