Shares fall, ‘critical’ rebalancing puts Nvidia in play: market report

(Bloomberg) — A massive expiration of options on Wall Street not only made stock traders more cautious, it also sent one of the bull market leaders on a roller-coaster ride.

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About $5.5 trillion is expected to expire on Friday during the quarterly “triple witching,” in which derivative contracts tied to equities, index options and futures mature. This time, Nvidia Corp. is playing an additional role. The value of contracts tied to the chipmaker on Friday is the second-largest of any underlying asset, trailing only the S&P 500. The expiration coincides with an index rebalancing by S&P Dow Jones Indices.

According to Steve Sosnick of Interactive Brokers, the “main” rebalancing will take place in the Technology Select Sector Index – which is the benchmark for the $80 billion XLK exchange-traded fund.

“Nvidia’s index weight will increase dramatically, mostly at the expense of Apple,” he said. “Given the importance of megacap tech stocks — and Nvidia’s importance in particular — on broad market indices, it’s not unreasonable for traders to be wary of big moves at the end of the day.”

As contracts expire, investors will adjust their positions, increasing the potential for volatility in individual holdings. Trading volume for the S&P 500 was 45% above its average over the past month. Nvidia nearly erased a 5% drop, then eased back down. Apple Inc. fared better.

The S&P 500 fell to 5,465. Nvidia lost nearly $200 billion in two days. Its market cap was about $3.1 trillion on Friday, lower than Apple’s $3.2 trillion and Microsoft Corp.’s $3.3 trillion.

The Treasury 10-year yield was little changed at 4.25%. France’s risk premium against Germany was the highest since 2012.

The ongoing AI frenzy that briefly made Nvidia the world’s most valuable company this week also fueled record inflows into tech funds, strategists at Bank of America Corp. said. About $8.7 billion flowed into tech funds in the week to June 19, according to a note from the bank, citing EPFR Global data.

Strategist Michael Hartnett said that “the ‘all roads lead to Nvidia’ trade has once again strengthened as Europe falters amid political turmoil in France.” Still, while investors still feel they need more exposure to AI-related games, “all asset allocators are concerned about equity concentration risk.”

Keith Lerner of Truist Advisory Services says the firm downgraded the technology sector to neutral, as the industry has outperformed the S&P 500 since an overweight call in November.

“While we still have a favorable long-term view of the technology, on a short-term basis the sector appears to be extended, and we would not pursue the sector,” Lerner said. “That said, the sector is far from bubble territory, and we believe the secular tailwinds around artificial intelligence will persist.”

Friday’s options event came at a crucial juncture for positioning markets for the second half of 2024 and the Federal Reserve’s next steps. Data showed that US services activity grew at the fastest pace in more than two years earlier this month. In addition, sales of existing homes declined for a third consecutive month.

“Investors should be prepared for dramatic developments,” 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 investors make now will be crucial to effectively navigating this period.”

John Stoltzfus of Oppenheimer Asset Management says he has a positive outlook on stocks because fundamentals show promise for improvement this year.

He added, “History shows us that stock and other asset class prices do not rise in a straight line; rather, they climb the proverbial “wall of worry,” requiring prudent diversification, patience and tolerance for risk and volatility for private investors, and discipline tied to institutional mandates for professional investors.”

Corporate Highlights:

  • Apple Inc. has pulled a slew of new technologies from millions of European Union consumers because of concerns about EU regulatory efforts to rein in Big Tech.

  • Airbus SE is inching closer to a deal with Spirit AeroSystems Holdings Inc. under which it will take control of parts of the aerospace supplier’s business, clearing the way for a major acquisition of the company by arch-rival Boeing Co. as early as next week.

  • American Airlines Group Inc. has postponed the training of new pilots until the end of this year, the latest move by a major U.S. airline amid uneven travel demand and delayed planes.

  • A top official at the U.S. Food and Drug Administration ignored critics and gave broad approval to Sarepta Therapeutics Inc.’s gene therapy for a rare muscle disease in children despite no data showing it actually slows the overall progression of the disease.

  • Carlsberg AS said it is considering its options after rejecting unsolicited takeover bids from Britvic Plc that valued the British soft drink maker at 3.1 billion pounds ($3.9 billion).

Some of the main activities in the market:

Shares

  • The S&P 500 lost 0.1% as of 3:44 p.m. New York time.

  • The Nasdaq 100 lost 0.1%

  • The Dow Jones Industrial Average was little changed

  • The MSCI World index fell 0.3%

Currencies

  • The Bloomberg Dollar Spot Index was little changed

  • The euro was little changed at $1.0694.

  • The British pound was little changed at $1.2649.

  • The Japanese yen fell 0.4% to 159.54 per dollar

Cryptocurrency

  • Bitcoin fell 1.5% to $64,088.96

  • Ether was little changed at $3,526.4.

Bonds

  • The yield on the 10-year Treasury was little changed at 4.25%

  • Germany’s 10-year yield fell two basis points to 2.41%

  • UK 10-year yield rate rose three basis points to 4.08%

Goods

  • West Texas Intermediate crude fell 0.8% to $80.66 a barrel.

  • Spot gold fell 1.6% to $2,322.25 an ounce

This story was generated with assistance from Bloomberg automation.

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