(Bloomberg) — Calm returned to markets as investors looked for bargains after a selloff in global stocks on Monday that peaked after three weeks of losses of about $6.4 trillion. Bond prices also fell.
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S&P 500 futures suggested a recovery could be on the way after the benchmark index fell to the brink of a technical correction on Monday. Nasdaq 100 futures rose more than 1%. The pan-European Stoxx 600 index rose 0.7% after falling to a five-month low yesterday.
Japan’s main stock indexes jumped more than 9% at the close, after falling 12% the previous day, while a regional index snapped a three-day slide.
Traders are catching their breath after a day that saw almost all risk assets sold off amid growing fears of a U.S. recession, extreme valuations in the technology sector and a stronger yen that sparked carry trades. Fears of a sudden downturn were somewhat tempered by figures on Monday showing the U.S. services sector expanded in July, after the worst contraction in four years the previous month.
“Markets are starting to regain some semblance of normality. We don’t think the US or European economies are heading for a hard landing. In our view, the violent moves in the markets over the past few sessions represent a buying opportunity,” said Mohit Kumar, chief economist for Europe at Jefferies International.
But the improvement could be temporary, depending on signals from the US economy and the Fed’s response. Wall Street’s “fear gauge,” the VIX, remains at its highest level since 2020 after hitting an all-time high yesterday. Traders are rushing to insure their portfolios against a severe market crash, echoing the chaotic early days of the pandemic.
“We have been reducing equity exposure across the board, seeking a balance between risk and safe assets to stabilize net asset values until the verdict is made on a soft versus hard landing,” said Michael Kelly, global head of multi-asset at Pinebridge Investments. “If we turn to the ‘R’ word, there’s more to do,” he added, referring to a potential U.S. recession.
Meanwhile, JPMorgan Chase & Co warned that the recent pullback in the carry trade has more room to run as the yen remains one of the most undervalued currencies.
“We are by no means done,” Arindam Sandelia, co-head of global foreign exchange strategy, said on Bloomberg TV. “The process of eliminating carry trades, at least within the speculative investment community, is 50% to 60% complete.”
Treasury bonds decline
Treasury yields rose globally, with the benchmark 10-year yield rising five basis points to 3.84%. The yield had fallen to 3.67% on Monday before rising again on a stronger-than-expected U.S. services report from the Institute for Supply Management.
“The hotter-than-expected ISM services report has slowed the bleeding on Wall Street,” said Matt Simpson, chief market strategist at City Index. “So we don’t see a risk to the rally per se, but rather a healthy correction after an unhealthy sell-off, driven by investors rushing for a small exit.”
San Francisco Federal Reserve President Mary Daly said the labor market is starting to slow and suggested the U.S. central bank should start cutting interest rates in the coming quarters, but she stopped short of concluding that the labor market is starting to weaken seriously. Swaps are pricing in a 50 basis point Fed rate cut in September.
In Asia, the yen fell about 1.5% on Tuesday, before recovering some of its losses. The yen has still gained about 11% this quarter amid expectations of a rate hike by the Bank of Japan.
A circuit breaker system was triggered for Nikkei 225 futures before the market opened as Monday’s fierce sell-off was deemed overdone. Rising Kospi 200 and Kosdaq 150 futures also triggered another “sidecar” in South Korea on Tuesday morning, briefly halting programmatic trading buy orders.
Japan’s 10-year sovereign bond auction on Tuesday drew the weakest investor demand since 2003, according to one measure, as expectations of more interest rate hikes deterred investors. Dealers sold the benchmark bonds in the secondary market, clearing safe-haven trades during an earlier selloff.
In commodities, oil prices rose from a seven-month low as attention returned to the Middle East due to a shutdown in Libya’s largest fields. Bitcoin rebounded to just over $56,000 after a wave of risk aversion in global markets caused major cryptocurrencies to lose heavily.
Main events this week:
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Eurozone Retail Sales, Tuesday
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China Trade and Foreign Exchange Reserves Wednesday
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US Consumer Credit, Wednesday
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Industrial production in Germany, Thursday
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US Initial Jobless Claims, Thursday
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Federal Reserve Board Member Thomas Barkin speaks Thursday.
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China CPI, Friday
Some key movements in the markets:
Stores
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The Stoxx Europe 600 index was up 0.7% by 8:02 a.m. London time.
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S&P 500 futures rose 1%.
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Nasdaq 100 futures rose 1.3%.
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Dow Jones Industrial Average futures rose 0.5%.
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MSCI Asia Pacific Index rose 3.2%
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The MSCI Emerging Markets Index rose 1.5%.
Currencies
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The Bloomberg Dollar Index rose 0.3%.
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The euro fell 0.2% to $1.0935.
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The Japanese yen fell 1.1% to 145.76 yen per dollar.
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The offshore yuan was little changed at 7.1431 against the dollar.
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The pound fell 0.3% to $1.2740.
Cryptocurrencies
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Bitcoin rose 2.5% to $55,763.01
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Ether price rose 2.9% to $2,509.03
Bonds
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The yield on the 10-year US Treasury note rose seven basis points to 3.86%.
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The yield on German 10-year bonds rose one basis point to 2.20%.
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The yield on the 10-year British bond rose three basis points to 3.89%.
Goods
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Brent crude rose 0.9% to $77 a barrel.
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Spot gold fell 0.3 percent to $2,404.27 an ounce.
This story was produced with the help of Bloomberg Automation.
–With assistance from Winnie Hsu, Jason Scott, and Abhishek Vishnoi.
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