Wall Street slides as dollar surges; UK political turmoil, Russia comments roil markets

The stock market opened Friday with a tentative bounce, then gave it back. By the close, the Dow had slipped 58 points, the S&P 500 had shed nearly 30 points, and the Nasdaq had dropped more than 120. It was the kind of day that felt like a test of conviction—and conviction, it turned out, was in short supply.

Three separate currents were pulling at investors' attention. In London, Prime Minister Liz Truss had just fired her finance minister, Kwasi Kwarteng, and begun dismantling the economic package that had spooked bond markets weeks earlier. The move offered little reassurance. Sterling collapsed, falling nearly 0.8 percent against the dollar in a single session. Across the Atlantic, the third quarter earnings season had kicked off with reports from JPMorgan Chase, Wells Fargo, and Citigroup—all of which rose on the news, briefly lifting the broader market. But the lift didn't hold. And then there was Russia. President Vladimir Putin announced that his mobilization of reservists would wrap up within two weeks, that there were no plans for further conscription, and that most of Ukraine's designated targets had already been struck. Futures had ticked up on the statement. By afternoon, that momentum had evaporated too.

The dollar, meanwhile, was having a day. It climbed against the British pound as the political chaos unfolded in Westminster. It surged against the Japanese yen, hitting a fresh 32-year high of 148.38 per dollar—a level that prompted Japan's finance minister to reiterate his government's willingness to intervene against excessive currency swings. The greenback's strength reflected a broader market reality: investors were pricing in a Federal Reserve that would keep interest rates elevated for months to come, possibly pushing toward 5 percent. That expectation had hardened after Thursday's inflation report showed core prices—excluding food and fuel—had risen 6.6 percent annually, the largest jump in four decades.

Robert Pavlik, a senior portfolio manager at Dakota Wealth in Connecticut, offered a reading of the day's whipsaw. The bank earnings had provided early momentum, he said, but it faded as traders began to question whether Thursday's dramatic reversal—when stocks had plummeted before surging back on the inflation news—represented genuine buying or merely short covering that would eventually exhaust itself. "Investors are asking themselves was this the real bottom," Pavlik said. "I doubt it was. Why would I jump back in with so much uncertainty regarding the Federal Reserve, the war in Ukraine and the UK?" The political instability in Britain was particularly unsettling, he added, because it echoed the cascading doubts that had characterized the 2008 financial crisis. "We can't be certain the U.S. is completely insulated from it."

In the bond market, the 10-year Treasury yield edged up to 3.983 percent, reflecting the expectation that the Fed would maintain its hawkish stance. The 2-year note climbed to 4.4917 percent. Oil prices fell sharply—U.S. crude dropped 3.29 percent to $86.18 a barrel—as fears of global recession and weakening demand in China overwhelmed the support from OPEC's recent decision to cut production. Gold, which typically benefits from uncertainty, instead fell more than 1 percent as the stronger dollar and the prospect of higher rates made the non-yielding metal less attractive. Spot gold dropped to $1,650.39 an ounce, putting it on track for its worst week in nearly two months.

Globally, the picture was mixed. Europe's STOXX 600 index rose 0.91 percent, and emerging market stocks gained 1.14 percent. But the MSCI gauge of worldwide equities shed 0.05 percent. The Bank of England's emergency bond-buying program was set to end Friday—a deadline that had been set to stabilize gilt markets after the mini-budget chaos of recent weeks. Yet the prime minister's moves appeared to have done little to restore confidence in either her government or the stability of British financial markets. The uncertainty, Pavlik's comments suggested, was not yet priced in. The real test would come in the weeks ahead, as earnings reports accumulated, the Fed met again, and the Ukraine situation continued to unfold.