Crypto Chaos Stirs Fresh Wall Street Selling as Inflation Report Looms

(Bloomberg) -- Enduring crypto chaos, an election signaling fresh partisan battles, an ugly Treasury auction. It was all too much for Wall Street to bear Wednesday, igniting the biggest cross-asset selloff in a month and raising the stakes ahead of a make-or-break inflation report.

As the existential crisis engulfing the biggest crypto players intensifies, investors are in no mood to blithely rebuild their risk exposures right now.

Read more: Binance Backs Out of FTX Rescue, Citing Finances, Investigations

Speculative darlings of the cheap-money era -- profitless tech firms and Bitcoin -- plunged anew to wipe out most pandemic-era gains. The S&P 500 sank 2% for a second time in a week. And investors loaded up on hedges in single stocks ahead of a consumer price reading that will heavily influence the next bout of disruptive policy tightening from the world’s biggest central bank. 

“The combo of hot CPI and crypto melt-down continuing would be a concerning one to two punch for the market,” said Dennis DeBusschere, the founder of 22V Research. 

With five major assets tracked by exchange-traded funds scoring a combined 5.3% loss, Wednesday marked the worst session for financial markets since mid-October. And more chaos looms on news that Binance will back out over a proposed bailout of Sam Bankman-Fried’s FTX.com. It’s a spectacular blowup for one the sector’s biggest exchanges -- sending prices for virtually every token into a freefall and sparking angst over a notoriously opaque industry that regulators fear poses a new risk to financial stability. 

In equities, risky stocks bore the brunt of Wednesday’s selling. A basket of unprofitable tech firms tumbled more than 6%. Cathie Wood’s ARK Innovation ETF (ticker ARKK), a poster child of the investing craze, dropped for a sixth session, hitting the lowest level since 2017. 

The equity selloff deepened following a weak auction in 10-year Treasuries. Amid reasons cited for the weaker showing, dealers may have been reluctant to take risk before the release of the October’s consumer price index, as the last two reports sparked selloffs.   

All this forms a treacherous backdrop for Thursday’s report, with the trading team at JPMorgan Chase & Co. warning that anything but a solid drop in the pace of price gains could spur a fresh wave of selling. 

A widespread selloff has become frequent in 2022’s market as everything from stocks to bonds and commodities got turned on almost exclusively on views as to whether the central bank will cause a recession. The obsession with economic data and remarks by Fed officials have driven a measure of cross-asset correlation tracked by Barclays Plc to spike in recent months, putting it among the highest levels of the past 17 years. 

Wednesday’s risk-off is a departure from earlier this week, when stocks brushed aside Jerome Powell’s hawkish posture. To Dan Suzuki, deputy chief investment officer at Richard Bernstein Advisors LLC, the pain is not over as a valuation-driven correction leaves equities still vulnerable to an economic growth shock. 

At the low in October, the S&P 500 was trading at 17.3 times profits, exceeding trough valuations from all 11 previous drawdowns and topping the median of those by 30%.

“The reality is if you step back from all the day-to-day noise, the predominant factor going forward is going to be about slowing growth,” Suzuki said. “Growth is going to be taking the driver’s seat, whereas the Fed repricing is going to take the back seat.”

--With assistance from .

More stories like this are available on bloomberg.com

©2022 Bloomberg L.P.