US stocks tumble from record highs as tech shares drag indexes lower

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Traders work during the opening bell at the New York Stock Exchange (NYSE) on February 28, 2020 at Wall Street in New York City.

US shares slipped on Monday, falling from record highs last week as technology shares dragged indexes lower. Investors remain cautious over the slew of corporate earnings ahead as well as the ongoing vaccine rollout in the US.

Leading the downturn was Tesla, with shares falling as much as 6.5% following the fatal car crash in Texas Saturday, which left two people dead. The electric car maker was a big laggard on the S&P 500 and Nasdaq Composite Index.

The consumer and real estate sectors also weighed on the benchmark index trading as analysts and investors anticipate earnings from nearly 80 companies this week.

“Wall Street could be in for a few choppy trading weeks as more of the same strong earnings beats becomes the theme,” Edward Moya, senior market analyst at OANDA, said in a note. “The bar was set too low this earnings season, but then again no one really thought it was possible that the US would reach herd immunity by June.”

Moya said the financial markets will likely look to how the bond market is positioned, especially with no major economic data on the horizon. Given this, he expects the 10-year Treasury yield to rise towards the 1.70% level if economic recovery optimism remains strong, and to drop to the 1.53% level otherwise.

The 10-year Treasury yield climbed 3.2 basis points to 1.605% in the afternoon after rising to 1.617% Monday morning.

Bank of America said Treasury yields will likely climb to a two-year high this year despite recent stabilization.

“We think technical factors combined with revised expectations on US growth are mostly responsible for the recent stabilization in US rates,” said Bank of America in a note Monday. It added that the stabilization “subsequently justifies” a rally in emerging markets and US equities and a selloff in the US dollar.

Still, Ryan Detrick, chief market strategist for LPL Financial, is optimistic the stock market will come out of COVID-19’s shadows despite some concerns about the economy overheating.

“In the United States, vaccinations are increasing, the economy is expanding, unemployment is falling, and stimulus continues to flow through the economy,” he told Insider. “With the consensus crowding into an optimistic corner, many investors are wondering if sentiment may be running too hot.”

Here’s where US indexes stood at the 4:00 p.m. ET close on Monday:

Shares of GameStop rose 6% as the company announced that its CEO George Sherman will step down on July 31 or upon the appointment of a successor. Shares were already up even before the company’s announcement, boosted by the company’s progress in making major changes led by activist investor Ryan Cohen.

Nvidia shares sank as much as 4% after UK regulators said they will probe the company’s proposed $40 billion takeover of British chipmaker Arm over national security concerns.

Over the weekend, bitcoin slipped to 17% to its lowest since February but recovered on Monday, regaining some momentum to climb above the $55,000 level. Last week, the cryptocurrency hit an all-time high of over $64,000 on excitement over Coinbase’s direct listing.

But technical analyst Katie Stockton of Fairlead Strategies said bitcoin’s decline could set it up for further downside if a key technical support level is decisively breached.

“The 50-day (~10-week) MA is being tested, and we believe consecutive closes below it would increase risk of a test of support near $42,000,” Stockton said in a note.

China pivoted in its stance on bitcoin, calling the digital asset an “investment alternative” – a comment that Beijing insiders described as “progressive” – after years of cracking down on cryptocurrencies, CNBC first reported.

Oil prices steadied on Monday tempered by a weaker dollar, despite rising coronavirus infections globally. West Texas Intermediate crude rose 0.46% to $63.42 per barrel. Brent crude, oil’s international benchmark, climbed 0.43%, to $67.06 per barrel, at intraday lows.

Gold climbed as much as 0.39% to $1,770.94 per ounce.

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Treasury yields will likely climb to a 2-year high in 2021 despite recent stabilization, Bank of America says

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The US bond market has experienced a big selloff during 2021.

The stunning rally in Treasury yields this year has stabilized for now but look for rates to resume their rise, says Bank of America, which foresees the 10-year Treasury marching up to a nearly two-year high of 2.5%. The 10-year yield hasn’t been above 2.1% since July 2019.

A spike in Treasury yields during 2021 has been a major focus for both bond and stock market investors. US debt has sold off massively this year in anticipation of hotter inflation rates that will likely accompany the US economy’s recovery from the COVID-19 pandemic.

Treasury yields rise as bond prices fall, with the march higher in yields implying more expensive borrowing costs for businesses and consumers.

The surge in long-dated yields, notably the 10-year yield’s rise to 14-month highs in mid-March, has largely cooled. The 10-year Treasury yield on Monday was around 1.587%, below the 1.76% level a month ago.

“We think technical factors combined with revised expectations on US growth are mostly responsible for the recent stabilization in US rates,” said Bank of America in a note Monday, saying the stabilization “subsequently justifies” a rally in emerging market and US equities and a selloff in the US dollar.

The 10-year yield, which is tied to a range of lending programs, during the first quarter scaled up quickly from about 1% at the start of 2021. Safe-haven bonds sold off as the US government rolled out more coronavirus vaccinations to millions of Americans and after lawmakers in March approved a $1.9 trillion fiscal stimulus program.

But now, “it should not be a surprise to anyone that the US economy will keep recovering at a fast pace. We started the year expecting 4.5% growth for 2021 and now we expect 7% and 5.5% for 2021 and 2022, respectively. The inability of US rates to selloff on the back of a strong March payroll number was the tipping point to stabilize the US rates market, the signal that most of the good news were priced in,” said Claudio Irigoyen, head of Latin America economics, equities, fixed income & FX strategy at Bank of America, in the note.

The US economy added 916,000 jobs in March, blowing past expectations of 660,000 jobs.

Irigoyen noted that there was a climb last week in yields in tandem with a rally in so-called risk assets. Last week, investors received a fresh round of strong US economic data including a nearly 10% jump in March retail sales and new unemployment filings hitting at a pandemic-era low.

“[Global] investors significantly reduced risk exposure on the back of the selloff in rates in 1Q21. Positioning clean up. Since asset managers didn’t observe redemptions, cash levels were abnormally high, in particular for EM dedicated investors. Investors with cash on the sidelines were waiting for US rates to stabilize to redeploy capital into risky assets,” he said, adding that “price action was dominated by short-term flow pressure.”

Investors, meanwhile, are still keeping tabs on communication from the Federal Reserve. The central bank has signaled that it plans to keep its benchmark interest rates near zero until at least 2024 but market participants have been questioning whether the Fed can stand still in the face of hotter inflation, which it aims to do to accommodate the economic recovery.

“Despite the recent stabilization in US rates, we keep our forecast of 2.15% and 1.5% for 10-year and 5-year Treasuries by year end,” said BofA. US economic growth “can surprise updated expectations to the upside during the summer, combined with positive (i.e. higher-than-expected) inflation surprises,” it said.

“In addition, fiscal policy in itself will continue pressuring on real rates as more infrastructure spending is still more likely than tax hikes, adding more to the already sizable fiscal deficit. Finally, the Fed in itself remains an important source of volatility,” wrote Irigoyen.

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Nearly half of Americans are too nervous to invest in stocks right now, new survey shows

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  • An Allianz survey found that 48% of Americans do not want to take action in the equity market right now.
  • The survey showed nearly 75% of Americans foresee stock-market volatility picking up again in 2021.
  • Analysts say more volatility is likely in store as more strong economic data challenges the Fed’s signaling on interest rates.
  • See more stories on Insider’s business page.

Many Americans want to stay on the sidelines of the stock market this year as worries mount that volatility will accelerate and hurt their investments, according to a new survey from Allianz.

48% of the 1,005 respondents told the firm they want to stay neutral and not invest in the market right now, a rise from 43% over the final quarter of last year. That statistic runs parallel with findings that 74% of the group believes equity markets will continue to be very volatile this year.

The cautious tone comes as the US economy shows further signs of recovery from the coronavirus pandemic, with data this week showing a nearly 10% jump in March retail sales and new unemployment filings at a pandemic-era low.

“Investors seem to be in limbo right now, wavering between nervousness about the potential for volatility and hope for a better year, resulting in a lot of inaction that can be costly in the future,” said Kelly LaVigne, vice president of consumer insights at Allianz Life.

As the S&P 500 recently has climbed to all-time highs, Wall Street’s so-called fear gauge – the Cboe Volatility Index (VIX) – has slid back to its lowest level since before the start of the COVID-19 crisis. But volatility accelerated in the tech sector earlier this year as rising interest rates spurred concerns about the effect of higher borrowing costs on businesses. That prompted a sharp pullback in numerous high-flying tech stocks and knocked more speculative areas of the market like SPACs and green energy.

Another possible source of volatility involves the Federal Reserve, which has historically moved markets with rate-hike guidance. Inflation – which the central bank monitors closely when making decisions – is rising as the economy recovers, and although the Fed has said it will keep rates near zero until at least 2024, any deviation from that could jolt markets.

Talks over tax policy and infrastructure spending in Washington may also be a source of volatility for stocks moving forward this year.

Read more: Buy these 16 stocks with more than 10% upside that are set to increase dividend payments for years to come, UBS says

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Dow, S&P 500 close at records amid strong global economic data

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The Dow Jones industrial average and S&P 500 closed at record highs on Friday as investors remain optimistic about the global recovery amid strong economic data.

China said its economy grew 18% in the first quarter of 2021, with the nation saw retail sales soar 34.2% in March. In the US, housing starts surged 19.4% to a a 15-year high on Friday after jobless claims tumbled to a pandemic-era low the prior day.

Here’s where US indexes stood at the 4 p.m. ET close on Friday:

Read more: Bank of America shares 6 ETFs to capitalize on what could be the greatest capital-spending boom in 4 decades as Biden’s infrastructure policy rolls out

Morgan Stanley concluded a blockbuster week for bank earnings, beating estimates in every major category – although the strong report was overshadowed by a $911 million loss linked to the Archegos Capital implosion.

Across Wall Street, Citigroup posted record profit, Goldman Sachs beat revenue and profit expectations on strong trading and investment-banking revenue, and JPMorgan and Wells Fargo turning in profit that surpassed Wall Street’s targets.

In a different realm of markets, Dogecoin went on a record-shattering rally this week. Elon Musk’s favorite meme-token spiked more than 100% on Friday to record highs.

West Texas Intermediate crude fell as much as 1%, to $62.83 per barrel. Brent crude, oil’s international benchmark, slid 0.8%, to $66.44 per barrel, at intraday lows.

Gold climbed as much as 1.1%, to $1,783.85 per ounce.

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Bitcoin-exposed companies climb in lockstep with crypto’s rally ahead of Coinbase’s listing

Coinbase Founder and CEO Brian Armstrong
Coinbase Founder and CEO Brian Armstrong

  • Companies with bitcoin exposure jumped on Wednesday ahead of the direct listing of Coinbase.
  • The rise is in lockstep with the broader rally in cryptocurrencies.
  • “The Coinbase IPO is being met with excitement that global crypto market cap will grow by at least 50% later this year,” an analyst said.
  • Sign up here for our daily newsletter, 10 Things Before the Opening Bell

Companies with bitcoin exposure jumped on Wednesday in lockstep with the broader cryptocurrency rally ahead of the highly anticipated direct listing of Coinbase.

“The Coinbase IPO is being met with excitement that global crypto market cap will grow by at least 50% later this year,” Edward Moya, senior analyst at OANDA, told Insider. “Each legitimate investment vehicle for cryptocurrencies is solidifying the belief that this bubble won’t come crashing down to zero.”

“All four of these have a direct benefit from bitcoin being up,” John Wu, president of Ava Labs, the company beside altcoin Avalanche, told Insider. “Others like PayPal who help facilitate the trading of crypto are up because of sentiment but they don’t actually own bitcoin.”

Wu said the stocks are now trading lower since investors are “buying the hype, selling the fact”. He added that investors may now be allocating ay from these names to the cryptocurrencies themselves.

Coinbase CEO Brian Armstrong on Wednesday during his interview with CNBC made the case as to why the public should invest in his firm rather than straight to the cryptocurrencies.

“We are kind of what you might call an index bet or a levered bet on the crypto space more broadly,” he said.

Tesla on February 8 disclosed its $1.5 billion bitcoin investment, according to a regulatory filing. Elon Musk’s company followed up with an announcement the next month that people can now buy a Tesla car with bitcoin.

MicroStrategy, meanwhile, holds the record as the first publicly listed company to buy bitcoin as part of its capital allocation strategy in August 2020. It’s since bought billions worth of the coin on multiple occasions and currently holds $5.4 billion, according to a regulatory filing. In April, Michael Saylor’s firm announced that it is paying non-employee board members entirely in bitcoin instead of cash.

As for Square, its founder and CEO Jack Dorsey has long been one of the staunchest advocates of bitcoin. In October 2020, Square announced it had purchased 4,709 bitcoins for an aggregate price of $50 million. The San Francisco-based company paid an average price of $10,617 for each bitcoin.

The Coinbase direct listing on the Nasdaq prompted a broader cryptocurrency rally.

Bitcoin broke its record for the third straight day, soaring to an all-time high above $65,000 Wednesday. Ether spiked as much as 8% to a new record high, hitting a $250 billion market capitalization for the first time on Tuesday. Dogecoin hit new records as well, jumping 34% to a valuation of $11 billion.

“Bitcoin and the other top altcoins are making fresh record highs as large parts of Wall Street are finally drinking the Kool-Aid,” Moya said.

The Coinbase direct listing is viewed by many cryptocurrency advocates as a milestone for the digital ecosystem as it looks to continue to make headway into mainstream financial markets.

“Coinbase is the first crypto company to make mainstream waves and is already valued higher than historic financial institutions like JP Morgan. This, coinciding with crypto’s market cap surpassing 2 trillion, provides the space with much-needed stability that will reassure retail investors,” Ganesh Swami, co-founder and CEO of Covalent, a provider of blockchain data, told Insider.

The stocks were all up during premarket trading but had pared some gains late Wednesday morning. Here’s where the stocks traded as of 10:51 a.m. ET:

  • Tesla down 0.37 to $759.00
  • MicroStrategy up 5.52% to $801.72
  • Square up $2.47% to $266.52
  • Galaxy Digital Holdings up 6.90 to $31.74

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Coinbase says the entire crypto market could be destabilized if Bitcoin’s anonymous creator is ever revealed or sells their $30 billion stake

brian armstrong coinbase
Coinbase CEO Brian Armstrong.

  • Coinbase will go public on the Nasdaq on Wednesday via a direct listing.
  • In its February filing, the trading platform cites Satoshi Nakamoto’s identity as a risk factor.
  • The creator’s cache of bitcoins could wreak havoc on the market if Nakamoto sold their collection.
  • Visit the Business section of Insider for more stories.

Cryptocurrency trading platform Coinbase – which has a over $100 billion valuation – said Satoshi Nakamoto could topple an over $1 trillion bitcoin market.

Coinbase will go public on Wednesday as a direct listing on the Nasdaq. The company has been assigned a reference price of $250 per share, according to NasdaqTrader.

In the documents the company released in February for its public debut, Coinbase said Satoshi Nakamoto – the pseudonym used by the individual or group of people who developed bitcoin – could cause significant damage to the company.

If the identity of the creator was revealed, it could cause bitcoin prices to deteriorate, according to the filing.

The filing also referenced Nakamoto’s personal stash of bitcoins, which totals over 1 million. As of April, one bitcoin was worth over $64,000 – an all-time record.

Nakamoto could negatively affect Coinbase, the company said, and destabilize the entire crypto market if the creator decided to transfer his bitcoins, which are valued at over $30 billion.

Read more: Mark Cuban explains how NFTs could provide new revenue streams for small businesses and creators

The creator was the first entity to ever mine for bitcoins, and Nakamoto’s stake in the digital currency accounts for nearly 5% of the entire bitcoin market, as there are only 21 million bitcoins that can be mined. The entire bitcoin market is worth over $1 trillion.

Bitcoin’s value has largely been driven by its deflationary tendencies. If 1.1 million bitcoins were released into the market, the digital currency’s price would almost surely fall.

Similarly, Bitcoin has been praised for its decentralized nature. The currency is not beholden to any institutions or individuals. If Nakamoto was unmasked, that would place the currency under a single entity, which could discourage traders that bought into the currency for its decentralization.

Coinbase’s success is largely tied to Bitcoin’s rise

In a nod to the Bitcoin creator, Coinbase listed Nakamoto as one of the recipients of its public filing.

Coinbase can attribute much of its success to Bitcoin and its creator, who in 2009 developed it as the first decentralized digital currency.

In the years since, Bitcoin has largely dominated the cryptocurrency world, rising over 400% in the past year alone to easily remain the largest digital coin by market cap.

Coinbase is poised to continue to benefit from the cryptocurrency’s rise. The trading platform is the largest in the US and has over 20 million users.

The company’s founder and CEO, Brian Armstrong, referenced the invention of Bitcoin in his letter that was included in the public filing in February.

“When I first read the Bitcoin whitepaper back in 2010, I realized this computer science breakthrough might be the key to unlock this vision of the future,” Armstrong said. “Cryptocurrency could provide the core tenets of economic freedom to anyone: property rights, sound money, free trade, and the ability to work how and where they want.”

Nakamoto’s name first came to public attention after the white paper was released. The paper outlined the principles of a decentralized peer-to-peer digital payment system. In 2011, the creator moved on from the system but has remained a figure of public interest.

There has been much speculation over the years on the creator’s identity. Names like the Bitcoin developer Nick Szabo, the entrepreneur Craig Wright, and Tesla CEO Elon Musk have been put forward as potential creators of the currency.

While it is unknown whether Nakamoto will ever choose to transfer their cache of bitcoins, it seems unlikely the creator will ever reveal their identity.

By maintaining anonymity, Nakamoto could avoid legal consequences. The untraceable nature of bitcoin has also led to its use for illegal goods and services on the dark web. In January, Treasury Secretary Janet Yellen called for more restrictions on digital currencies like bitcoin because of their use in illegal financing.

The unveiling would also violate one of bitcoin’s founding principles that was outlined in its white paper. If a creator was unmasked, it would pose a threat to the decentralized nature of the currency – a tenet Nakamoto put at the center of his plans for Bitcoin.

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US stocks hover near record highs as traders digest strong mega-cap bank earnings

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  • The S&P 500 stuck close to record highs as the first-quarter earnings season kicked off.
  • Goldman Sachs, JP Morgan Chase and Wells Fargo each turned in better-than-expected results.
  • Coinbase will make its trading debut on Wednesday.
  • See more stories on Insider’s business page.

US stocks clung near record highs Wednesday as the first-quarter earnings season began its shift into high gear with blowout earnings results from big banks including Goldman Sachs.

The S&P 500 sought to build on its record close Tuesday that was led by tech stocks. Shares in that sector were also higher on Wednesday, giving a boost to the Nasdaq Composite.

The new quarterly earnings season started out with JP Morgan Chase JP Morgan Chase and Wells Fargo each turning in profit that surpassed Wall Street’s targets. Goldman Sachs beat revenue and profit expectations, aided by strong trading and investment banking revenue.

Here’s where US indexes stood at 9:30 a.m. on Wednesday:

A light economic calendar will “leave plenty of time for investors to watch the debut of Coinbase to the public markets. The listing couldn’t come at a better time for the company as crypto-currencies have been on absolute fire with both bitcoin and ether trading at record highs and riding what looks to be their seventh straight day of gains,” said Paul Hickey, co-founder of equity research firm Bespoke in a note.

Around the markets, Credit Suisse reportedly put $2 billion of Archegos-linked stocks on the market after the hedge fund’s meltdown. Part of the stock offering included Discovery Communications whose shares were lower Wednesday.

The First North American bitcoin ETF surges beyond $1 billion under management.

Gold fell 0.5% to $1,737.50 per ounce. Long-dated US treasury yields rose, with the 10-year yield at 1.634%.

Oil prices rose. West Texas Intermediate crude gained 2.2% to $61.50 per barrel. Brent crude, oil’s international benchmark, moved up 2.1% to $65.05 per barrel.

Bitcoin surged to $64,115.

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US futures hover near record highs as investors nervously await key US inflation data

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Wall Street awaited US inflation data on Tuesday.

Futures contracts for the major US stock indices were mixed on Tuesday, hovering near record highs as investors awaited key inflation data from the world’s biggest economy.

S&P 500 futures were edged 0.05% higher after the index finished 0.02% lower on Monday, taking it narrowly below Friday’s all-time high. Dow Jones futures rose 0.1% and Nasdaq 100 futures were roughly flat.

Asian stocks moved broadly higher overnight after data showed Chinese imports and exports rebounded in March. Japan’s Nikkei 225 rose 0.72%, but China’s CSI 300 index slipped 0.16% as a spike in yields on the debt of a major asset manager unnerved investors.

In Europe, the continent-wide Stoxx 600 index rose 0.25%. The UK’s FTSE 100 slipped 0.04% despite data showing the country’s GDP rose 0.4% in February.

Meanwhile, bitcoin soared to an all time high of above $62,000 ahead of crypto exchange Coinbase’s IPO, with renewed institutional interest powering the latest leg higher.

The main event on investors’ radar on Tuesday will be US consumer price index inflation data, due at 8.30 a.m. ET.

Predictions of higher growth and inflation have already caused a spike in bond yields, which have in turn weighed on the fast-growing parts of the stock market like technology shares, which look relatively less attractive when yields rise.

Analysts expect Tuesday’s data to show US CPI inflation rose to 2.5% in March from 1.7% in February.

Inflation “has emerged as a key focal point for markets given the debates surrounding inflation and its implications for monetary policy moving forward,” strategist Jim Reid at Deutsche Bank said.

“Indeed, part of the reason that markets have brought forward their expectations for Fed rate hikes is based around rising inflation expectations that they think the Fed might have to rein in.”

Karen Ward, JPMorgan Asset Management’s chief European strategist, has said she thinks inflation could average 3% over the next 10 years, thanks in part to huge amounts of pent-up savings.

However, Goldman Sachs chief economist Jan Hatzius predicted in a note that underlying US inflation would remain “well below the Fed’s 2% target, consistent with an economy that remains well below full employment.”

Bond yields climbed on Tuesday morning, with the yield on the key 10-year US Treasury note rising 1.5 basis points to 1.691%. Yields move inversely to prices.

Investors will also be keeping an eye on 30-year US Treasury auctions, after 3- and 10-year sales attracted solid demand.

Oil prices edged higher, with Brent crude up 0.4% to $63.54 a barrel and WTI crude 0.3% higher to $59.87 a barrel.

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Stocks slip from records as optimism over economic recovery pauses

Traders work on the floor of the New York Stock Exchange (NYSE) on November 20, 2019 in New York City
Traders work on the floor of the New York Stock Exchange (NYSE) on November 20, 2019 in New York City

All three major US indexes ended lower to start the week as investors take a breather from the economic recovery-fueled optimism that sent stocks to record highs on Friday.

Wall Street is now awaiting earnings later this week and key inflation data that’s due Tuesday. Economists polled by Reuters expect the consumer price inflation index to jump 2.5% from 1.7% year on year in February. But there’s a risk that the Fed and economists are unprepared for the magnitude of economic growth and inflation, according to Bank of America.

Semiconductor stocks swerved Monday,with Intel and AMD each falling about 4% after Nvidia announced plans to manufacture its own CPU processor. The news sent shares of Nvidia surging by as much as 4%.

Here’s where US indexes stood at the 4:00 p.m. ET close on Monday:

Canaccord Genuity upgraded Tesla to a “buy” rating on Monday, with analyst Jed Dorsheimer explaining that Tesla’s budding energy storage business has long-term potential. Tesla jumped as high as 3.9%.

Veteran investor Danny Moses compared the stock-market boom to the dot-com bubble, underscored the dangers of excessive leverage and liquidity, and called for the Federal Reserve to temper its stimulus efforts in a recent interview. Here are his 16 best quotes.

Bitcoin rose as much as 2.6% to $61,229 as the crypto world prepares for Coinbase’s direct listing on Wednesday. The surge took the coin close to its all-time high of $61,742 reached on March 1.

West Texas Intermediate crude climbed 0.7%, to $59.71 per barrel. Brent crude, oil’s international benchmark, rose 0.5% to $63.30 a barrel.

Gold slipped 0.8%, to $1,731.70 per ounce.

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3 reasons why volatility could come roaring back to a stock market that’s drifting along near record highs, according to UBS

NYSE Trader
Traders at the New York Stock Exchange.

  • A key tracker of stock-market volatility at its lowest since early 2020 at the same time that US stocks are at record highs.
  • Investors should anticipate Wall Street’s so-called “fear gauge”, or VIX, to come off those lows in the coming months, said UBS.
  • Volatility may pick up pace as investors wrestle with inflation worries and COVID-19 variants.
  • See more stories on Insider’s business page.

Wall Street’s key measure of stock-market volatility is at its lowest since the COVID-19 crisis took off in the US last year, but that calmness will likely break over the next few months, according to UBS.

The US stock market has soared to record highs in 2021 on the back of accelerating coronavirus vaccinations worldwide and roughly $5 trillion in financial aid deployed by the US government to mitigate the pandemic’s economic damage. The vaccinations and stimulus packages have been laying the groundwork for a further reopening of the world’s largest economy as people begin to rebuild work and school routines and spend the money sent to them by Uncle Sam.

The S&P 500 index has shot above the 4,100 level and the Dow Jones Industrial Average tracking blue-chips is at its strongest levels, driven by cyclical sectors such as energy and industrials that stand to benefit from increased economic activity.

Wall Street’s so-called “fear gauge,” at the same time, has dropped below the 17 level, the lowest since early February 2020, before the World Health Organization declared the coronavirus outbreak a pandemic. But don’t expect the Cboe volatility index to continue to stay that low, said the world’s largest wealth manager in a note published Friday.

UBS noted a news report that at least one investor bought about $40 million in VIX call options that indicate the buyer expects market volatility to pick up pace over the next three months. One or more investors anticipated the VIX to reach above the 25 level and rise towards 40 by mid-July, Reuters reported, citing trading data.

“We see reasons to expect periodic bouts of higher volatility in the near term,” said Mark Haefele, chief investment officer at UBS Global Wealth Management, in the note.

Growth vs inflation

Firstly, investors may be torn between optimism over accelerating economic growth and worries over higher inflation. Among the signs that recovery is taking further hold was the recent and strongest reading in services-sector activity since 1997 from the Institute for Supply Management. European growth should also strengthen as vaccinations increase.

“Still, as pent-up demand meets supply constraints, a pickup in inflation could well unsettle investors,” said the investment bank. This week, Dallas Federal Reserve President Robert Kaplan said inflation could rise “well in excess of 2.5%,” over the summer, which would be well above the Fed’s 2% target.

COVID-19 strains

Investors have so far looked through news about variant strains of COVID-19. “This optimism could be put to the test by the spread of new variants of the virus, especially in areas where the vaccination effort has been progressing well, such as in the US.”

UBS noted “pockets” of rising infections in Ohio and Wisconsin.

Trading activity

Volatility has been “sporadically heightened” by a rise in institutional and retail activity in the options market, along with the increased share of growth stocks in major equity indexes, said UBS.

“In the first quarter we saw retail activity driving volatility in individual stocks, such as GameStop, which spilled over into broader market swings,” said Haefele.

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