Stocks closed well off session lows as comments from Federal Reserve officials brought some relief to investors worried that a more aggressive pace of rate hikes could trigger a recession.

The S&P 500 almost erased a slide that topped 2 per cent as Fed Governor Christopher Waller and Fed Bank of St. Louis President James Bullard said they would back a 75-basis-point hike in July after a hot inflation print. The tech-heavy Nasdaq 100 climbed amid gains in giants like Apple Inc. and Intel Corp.

About US$1.9 trillion of options are set to expire Friday, obliging investors to either roll over existing positions or start new ones. The monthly event includes US$925 billion of S&P 500-linked contracts and US$395 billion of derivatives across single stocks scheduled to run out, Goldman Sachs Group Inc. estimates. 

Treasury two-year yields fell as traders shifted their bets away from a full-point hike by the Fed this month. Markets may have gotten a little ahead of themselves in betting on a move of that magnitude, Waller said. The Bloomberg Dollar Spot Index pared gains, but still traded at an all-time high.

Investors got a reality check from the corporate side Thursday, with JPMorgan Chase & Co. temporarily halting buybacks as earnings fell short of estimates, and Morgan Stanley announcing a plunge in investment-banking revenues. Still, the chiefs of both banks said they aren’t steering their firms toward shelter even as they see global events denting the economy.

“People are confused as to where the economy is actually heading,” said Victoria Fernandez, chief market strategist at Crossmark Global Investments. “Are we going into recession? Are we not? Is it going to be a short recession? Is it going to be a deep recession? That’s why we’re seeing so much volatility in the market. People just don’t have a clear direction right now.”

Shrinking the Fed’s US$8.9 trillion balance sheet will have an effect over time equivalent to no more than three quarter-point interest-rate hikes, according to a new study by a Fed Bank of Atlanta economist. That suggests the asset reductions will have a relatively modest effect compared to rate hikes to counter inflation.

“We remain skeptical that the Fed can pull off simultaneously normalizing its balance sheet, controlling inflation, and avoiding severe market disruptions,” said Richard Saperstein, chief investment officer at Treasury Partners. “We’re increasingly concerned that investors may be forced to endure more downside volatility in this tricky environment.”

In other corporate news, US-listed China stocks tumbled as a report that Alibaba Group Holding Ltd. faces an inquiry in China in connection with a data-theft case renewed regulatory concerns broadly. 

Elsewhere, Bitcoin broke above US$20,000, joining gains in tech stocks while investors got more clarity on the bankruptcy of a major digital-assets lender. 

Wall Street’s top regulator may use its authority to exempt crypto companies from certain securities laws to help the industry come into compliance, said Securities and Exchange Commission Chair Gary Gensler

What to watch this week:

• China GDP, Friday
• US business inventories, industrial production, University of Michigan consumer sentiment, Empire manufacturing, retail sales, Friday
• G-20 finance ministers, central bankers meet in Bali, from Friday
• Atlanta Fed President Raphael Bostic speaks, Friday

Some of the main moves in markets:

Stocks

• The S&P 500 fell 0.3 per cent as of 4 p.m. New York time
• The Nasdaq 100 rose 0.3 per cent
• The Dow Jones Industrial Average fell 0.5 per cent
• The MSCI World index fell 0.8 per cent

Currencies

• The Bloomberg Dollar Spot Index rose 0.6 per cent
• The euro fell 0.4 per cent to US$1.0016
• The British pound fell 0.6 per cent to US$1.1823
• The Japanese yen fell 1.1 per cent to 138.94 per dollar

Bonds

• The yield on 10-year Treasuries advanced four basis points to 2.97 per cent
• Germany’s 10-year yield advanced three basis points to 1.18 per cent
• Britain’s 10-year yield advanced four basis points to 2.10 per cent

Commodities

• West Texas Intermediate crude fell 0.1 per cent to US$96.19 a barrel
• Gold futures fell 1.6 per cent to US$1,707.50 an ounce