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Here’s how traders talked themselves into a sell-off

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Jerome Powell, governor of the U.S. Federal Reserve and President Donald Trump's nominee as chairman of the Federal Reserve, arrives to a nomination announcement in the Rose Garden of the White House in Washington, D.C., on Thursday, Nov. 2, 2017.

Olivier Douliery | Bloomberg | Getty Images

Jerome Powell, governor of the U.S. Federal Reserve and President Donald Trump’s nominee as chairman of the Federal Reserve, arrives to a nomination announcement in the Rose Garden of the White House in Washington, D.C., on Thursday, Nov. 2, 2017.

Well, that was confusing. There were no news items that dropped the markets in the last 45 minutes of trading. Instead, traders seemed to talk themselves into a belief that the Fed was going to be more hawkish than its own statement seemed to indicate.

Stocks were modestly higher all day until the minutes from the Federal Reserve’s January meeting came out at 2 p.m. ET. Traders liked what they heard: The Fed said there were few signs of a broad-based increase in wage growth.

Traders have been worried that inflation is picking up, and that higher rates would kill the rally, so the Fed saying it’s not too worried was greeted as a positive sign, and bond yields initially dropped.

But then it all turned. Bond yields, which move opposite price, moved back up from about 2.91 percent on the 10-year to over 2.95 percent. And predictably, the stock market’s rally fizzled.

What happened? It was widely noted right after the Fed minutes came out that this meeting occurred before the January jobs and wage report came out, which both were stronger than expected. The meeting also occurred before President Trump signed a new budget that contained a significant increase in deficit spending.

The bottom line is this: After thinking about it, most traders seemed to agree that if the Fed meeting had been held now, with all the information that’s come out since the January meeting, the central bank would sound more hawkish than it did back then.

That’s how fast all this is changing.

In theory, gradually higher rates should not derail the rally, a point made by J. P. Morgan in a note to clients on Wednesday. “While rising long-term rates will ultimately become a negative for profits and multiples, we do not see current levels as a reason to de-risk and sell equities,” wrote Dubravko Lakos-Bujas, the bank’s head of U.S. Equity Strategy.

He noted that the recent rise in rates corresponds to stronger economic growth, positive earnings revisions, tax reform, and higher government spending, all of which are positive for equities.

But traders are clearly not interested in theories. While the selloff Wednesday occurred on lighter volume than recent activity, the market decline accelerated after 3 p.m., when the S&P sank below the lows set earlier in the day.

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U.S. jobs, Australia’s trade data, currencies and oil

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SINGAPORE — Shares in Asia-Pacific looked poised for a lower start on Thursday, following declines overnight on Wall Street that saw the Dow Jones Industrial Average dropping more than 300 points.

Futures pointed to a lower open for Japanese stocks. The Nikkei futures contract in Chicago was at 27,530 while its counterpart in Osaka was at 27,490. That compared against the Nikkei 225’s last close at 27,584.08.

Shares in Australia also looked set for an opening slip, with the SPI futures contract at 7,398.0, versus the S&P/ASX 200’s last close at 7,503.20.

Australia’s trade data for June is set to be out at 9:30 a.m. HK/SIN on Thursday.

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Overnight stateside, the Dow dropped 323.73 points to 34,792.67 while the S&P 500 slipped 0.46% to 4,402.66. The Nasdaq Composite outperformed as it rose 0.13% to 14,780.53.

The moves on Wall Street came after jobs data from payroll processing firm ADP came in well below expectations. The ADP private payroll survey showed a gain of 330,000 jobs for July, well below the consensus estimate of 653,000. The more closely watched Labor Department nonfarm payrolls release is set to be out on Friday.

Currencies

The U.S. dollar index, which tracks the greenback against a basket of its peers, was at 92.27 following a recent bounce from below 92.

The Japanese yen traded at 109.49 per dollar following a weakening yesterday from levels below 109 against the greenback. The Australian dollar changed hands at $0.7381, still higher than levels below $0.735 seen earlier in the trading week.

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GM confirms new electric truck and van for commercial customers

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General Motors plans to launch a new all-electric van called the EV600 by the end of this year. The first 500 vehicles will be sold to FedEx.

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General Motors on Wednesday confirmed that it will add two new electric vehicles to its commercial lineup in the coming years, outside of its recently launched BrightDrop business.

GM CEO Mary Barra said the automaker plans to add a full-size battery electric cargo van for Chevrolet as well as a medium-duty truck for service and utility vehicles such as school buses and bucket trucks.

“Both will complement BrightDrop and keep our commercial fleet market share growing,” Barra told investors Wednesday during an earnings call. “We’ll share more details about these products as we move forward.”

Barra did not disclose timing or other details about the vehicles. The company is investing in the products as part of a previously announced plan to increase spending on electric and autonomous vehicle by 30% to $35 billion through 2025. But the vehicles aren’t expected to launch until after that timeframe, according to a person familiar with the plans.

The medium-duty truck will be offered as a battery-electric vehicle with GM’s Ultium Cells as well as its Hydrotec fuel cells, Barra said. The van will “exceed the expectations” of its customers who have purchased small GM vans in recent years, she said.

The commercial market is expected to be a major growth area for EVs. Other start-up automakers like Amazon-backed Rivian as well as legacy automakers such as Ford Motor and Daimler have announced plans to enter the segment.

GM announced BrightDrop in January as a new wholistic EV commercial and logistics business, separate from its current commercial business that focuses on small vans and pickups.

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What to know about the Ethereum London hard fork EIP-1559 upgrade

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Ethereum, the blockchain that runs ether, the second-largest cryptocurrency under bitcoin, will undergo a major upgrade this week.

Slated for Thursday, the upgrade, called London, includes Ethereum Improvement Proposal (EIP) 1559, which aims to change the way transaction fees, or “gas fees,” are estimated.

Currently, users must bid for how much they’re willing to pay to have their ether transaction picked up by a miner, which can be extremely costly. Under EIP-1559, this process will be handled by an automated bidding system with a set fee amount that fluctuates based on how congested the network is.

“This is great for Ethereum casual users and makes the protocol less intimidating to use,” Eric Conner, a co-author of EIP-1559 and co-founder of EthHub, tells CNBC Make It.

Another major change under EIP-1559 is that part of every transaction fee will be burned, or removed from circulation, which will begin to reduce the supply of ether and potentially boost its price.

That’s why, in part, “EIP-1559 is one of the most significant upgrades to Ethereum since the network’s launch,” says Meltem Demirors, CoinShares chief strategy officer.

Here’s what investors should know as the upgrade rolls out.

What EIP-1559 means for investors

While EIP-1559 aims to strengthen the ecosystem of Ethereum ⁠— which is known for its smart contract capabilities that power DeFi, or decentralized finance, apps and NFTs, or nonfungible tokens, among other things ⁠— it isn’t likely that there will be much short-term impact on investors, Demirors says.

Long-term, however, the proposal’s co-authors hope to make ether deflationary by reducing the supply. This would be “extremely beneficial” for investors, Conner says, especially “with all the recent talk of inflation in the United States.” It would give crypto investors an option to hold a deflationary asset.

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But the EIP-1559 proposal alone will not make ether deflationary, Demirors says.

“Many of these expectations are likely too optimistic in the short-term, and will become more material in the long-term,” she says. That’s because “the nominal amount of gas burned won’t outpace network inflation.”

EIP-1559 also wouldn’t lower gas fee prices or the cost of transactions on the network, which can be very high.

Still, the upgrade is important since it has the potential to improve Ethereum’s user experience and may boost the price of ether.

Other innovations surrounding Ethereum are in the works as well, Demirors says. That includes the planned migration from a proof of work (PoW) model to a proof of stake (PoS) model later this year or early 2022.

Under the PoS model, a person can mine or validate transactions according to how many coins they hold. In a PoW model, miners must compete to solve complex puzzles in order to validate transactions. Supporters of the PoS model say it will use less energy and better the blockchain’s efficiency.

“Taken together, EIP-1559 and the move to PoS will have a major impact on miners and the economics of Ethereum,” Demirors says, “but at the moment, the upgrade alone does not.”

Overall, “I think the most important thing that EIP-1559 shows to investors is that Ethereum is still an actively developed project which refuses to stagnate and become obsolete,” Conner says.

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