US stocks rose and Treasury yields fell in a cautious rally as investors braced for heightened risk of a global recession.
The S&P 500 rose 1.6%, after ending Monday’s session at its lowest level in nearly two years. Bond pressure eased somewhat after the worst selloff in decades, with the benchmark 10-year U.S. Treasury yield falling to its highest level since 2010. The dollar was broadly weaker after hitting a fresh low. record on Monday.
While Federal Reserve officials this week reiterated the central bank’s determination to aggressively control inflation, Chicago Fed President Charles Evans indicated he was a little concerned about the pace rate hikes.
“With the likes of Evans softening their tone a bit this morning, several different markets certainly appear to be ripe for a reversal that will last longer than a day,” wrote Matt Maley, chief market strategist at Miller Tabak. “It’s not a major shift in rhetoric. In fact, we’re sure other Fed members will remain very hawkish this week, but it looks like they want a few members to tone it down a bit, and that might be enough to help markets see some short-term reversals.”
Markets are stretching into oversold territory, wrote Art Hogan, chief market strategist at B. Riley. The Relative Strength Index, a momentum indicator used in technical analysis, posted a reading of 27 for the S&P 500, one of the most oversold conditions this year, according to data from Bloomberg. A reading of 30 or less indicates an oversold condition.
“The market rarely rewards one-sided trades, so a strong rally could be underway this week as too many investors are caught off guard,” Hogan wrote. “I’m not suggesting ignoring tough markets, but rather seeing how much bad news we’ve already priced in effectively. I know we’ve always managed to get to the other side and I don’t see any reason why that would be different this time, even against the most hawkish Fed we’ve seen since the Volcker era.
Investors are also scanning a slew of economic data for hints of lower prices, as they await additional comments from Fed speakers this week. Tuesday’s latest data showed U.S. home price growth slowed in July and U.S. durable goods orders fell 0.2% in August. But the value of orders for basic capital goods, which is a proxy for investment in equipment that excludes aircraft and military equipment, rose last month the most since January, even as rates interest increases.
BEYOND THE USA
UK long-term bonds reversed earlier gains to tumble on concerns over the country’s fiscal and monetary policy, sending the 30-year yield to its highest level since 2007.
The country’s stock and bond markets have lost at least US$500 billion in combined value since Liz Truss took over as prime minister and traders have remained cautious about the risk of the currency crashing to parity with the dollar after the Bank of England indicated that it could not act before November to stem the rout.
The volatility in the markets was also reflected in the risk of future price swings, which rose to its highest level since the start of the pandemic, as shown by a Bank of America index.
Meanwhile, Germany suspects damage to the Nord Stream pipeline system used to transport Russian gas to Europe was the result of sabotage. Benchmark gas prices in Europe soared as much as 12% on Tuesday after four days of losses. Oil and gold also rose.
Key events this week:
- Conference Board Consumer Confidence, Tuesday
- Fed Chairman Jerome Powell and Charles Evans speak at events on Tuesday
- The Fed’s Mary Daly, Rafael Bostic, Charles Evans and ECB President Christine Lagarde speak at events on Wednesday
- Eurozone Economic Confidence, Consumer Confidence, CPI Germany, Thursday
- U.S. initial jobless claims, GDP, Thursday
- Fed’s Loretta Mester and Mary Daly speak at events Thursday
- Chinese PMI, Friday
- Eurozone CPI, unemployment, Friday
- U.S. Consumer Income, University of Michigan Consumer Sentiment, Friday
- The Fed’s Lael Brainard and John Williams speak Friday
Some of the major movements in the markets:
Shares
- The S&P 500 rose 1.5% at 9:38 a.m. PT
- The Nasdaq 100 rose 2%
- The Dow Jones Industrial Average rose 1.2%
- The Stoxx Europe 600 rose 0.5%
- The MSCI World index fell 1.3%
Currencies
- The Bloomberg Dollar Spot Index fell 0.3%
- The euro rose 0.3% to reach US$0.9637
- The British pound rose 0.8% to reach US$1.0771
- The Japanese yen rose 0.1% to 144.59 per dollar
Cryptocurrencies
- Bitcoin rose 6.3% to US$20,326.06
- Ether rose 5.5% to US$1,398.11
Obligations
- The yield on 10-year Treasury bills fell four basis points to 3.89%
- Germany’s 10-year yield rose five basis points to 2.16%
- The UK 10-year yield rose five basis points to 4.29%
Goods
- West Texas Intermediate crude rose 1.4% to US$77.78 a barrel
- Gold futures rose 0.6% to US$1,642.60 an ounce