US stock indexes settled mixed on Friday, with the broader market recovering from early losses to finish mostly higher. The S&P 500 Index closed up 0.17%, while the Nasdaq 100 Index surged 0.67%, driven by strength in chipmakers and AI-infrastructure stocks. The Dow Jones Industrial Average lagged, closing down 0.18%. The rally was underpinned by a sharp reversal in energy markets, as crude oil prices gave up an early advance and fell more than 1% on hopes that diplomacy could resume crude flows from the Middle East.

Market Context

The session was characterized by heightened volatility due to the quarterly expiration of equity options, futures, and derivatives, known as triple witching. Citadel Securities estimated that approximately $7 trillion of options were set to expire during the session, marking one of the largest expiration events on record. Index rebalancing also contributed to market turbulence, with Bloom Energy, Illumina, and Everpure added to the S&P 500 after the close, while SpaceX received a weighting boost from a Nasdaq 100 rebalance.

Analysis

Short covering emerged in equities after crude oil prices reversed course, providing support to the broader market. Despite the equity gains, higher bond yields initially weighed on stocks, with the 10-year Treasury note yield rising 6 basis points to 5.00%. This move in yields reflected market expectations for the Federal Reserve to raise interest rates at least one more time this year. Kansas City Fed President Jeff Schmid reinforced this hawkish stance, stating that the Fed has "work to do on inflation" and that this week's action was a step in that direction. He noted that while higher oil prices have been an important driver of elevated inflation, the broader inflation problem is not solely about energy.

Additional pressure on sentiment came from weaker-than-expected US economic data. August manufacturing production unexpectedly fell 0.3% month-over-month, missing expectations of a 0.3% increase and marking the largest decline in 10 months. Furthermore, US August leading indicators unexpectedly fell 0.1%, contrary to expectations of a 0.1% increase, representing the first decline in five months. Conversely, cryptocurrency-exposed stocks rallied alongside Bitcoin, which rose more than 5% to a two-week high after the SEC moved forward with a plan to allow digital versions of securities to start trading in the US.

Key Numbers

- S&P 500 Index ($SPX) closed up +0.17%

- Nasdaq 100 Index ($IUXX) closed up +0.67%

- Dow Jones Industrial Average ($DOWI) closed down -0.18%

- Crude oil prices fell more than -1% after giving up an early advance

- 10-year T-note yield rose +6 bp to 5.00%

- US Aug manufacturing production fell -0.3% m/m (vs. +0.3% expected)

- US Aug leading indicators fell -0.1% (vs. +0.1% expected)

- Bitcoin (^BTCUSD) rose more than +5% to a 2-week high

- Approximately $7 trillion of options expired during the session

- December E-mini S&P futures (ESZ26) rose +0.20%

- December E-mini Nasdaq futures (NQZ26) rose +0.70%

What to Watch

Traders should monitor developments in Middle East diplomacy, as any confirmation of resumed crude flows could sustain the downward pressure on oil prices and support equity sentiment. Attention will also shift to upcoming Federal Reserve communications following Kansas City Fed President Jeff Schmid's comments about the need for further action on inflation, with markets pricing in potential additional rate hikes. Additionally, the market will assess the sustainability of the Nasdaq's strength in chipmakers and AI stocks against rising bond yields, while keeping a close eye on Bitcoin's price action and regulatory developments regarding digital securities trading in the US.