Stock futures climb after biggest market selloff in years

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A semblance of calm returned to markets as investors looked for bargains after Monday’s dramatic selloff that capped a three-week, US$6.4 trillion retreat in equities globally. Bonds fell.

Futures on the S&P 500 climbed about 1 per cent, signalling a rebound may be in store after the benchmark sank to the brink of a technical correction on Monday. Nasdaq 100 contracts gained 1.4 per cent. Europe’s Stoxx 600 index rose 0.6 per cent after yesterday’s slump to a five-month low.

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Japan’s two key share gauges both jumped more than 9 per cent at the close, after tumbling 12 per cent the day before.

Traders are catching their breath following a day in which almost every risk asset was sold amid growing concern about a United States recession and extreme valuations in the technology sector, while a surging yen sparked an unwind of carry trades. Fears of an abrupt downturn were somewhat allayed by data Monday showing the U.S. services sector expanded in July.

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“Some normalcy has started to return to the markets,” said Mohit Kumar, chief economist for Europe at Jefferies International Ltd. “The violent market moves over the last few sessions, in our view, present a buying opportunity.”

The respite may be temporary, however, depending on the next signals from the U.S. economy and the Federal Reserve’s response. Wall Street’s “fear gauge,” the VIX index, remains at the highest level since 2020 after spiking the most on record yesterday. Traders are rushing to insure their portfolios against an extreme market crash, in an echo of the chaotic period at the start of the pandemic.

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“We have cut equity risk overall, seeking a net asset value-stabilizing balance of risk and safety assets until the soft- versus-hard landing verdict is in,” said Michael Kelly, global head of multi-asset at PineBridge Investments. “If we morph into the ‘R’ word, there’s more to go,” he added, referring to a potential recession in the U.S.

Meanwhile, JPMorgan Chase & Co. warned the recent unwinding in the carry trade has more room to run as the yen remains one of the most undervalued currencies.

“We are not done by any stretch,” Arindam Sandilya, co-head of global FX strategy, said on Bloomberg TV. “The carry trade unwind, at least within the speculative investing community, is somewhere between 50 per cent-60 per cent complete.”

Treasuries Retreat

Treasury yields rose across the curve, with the benchmark 10-year yield climbing eight basis points to 3.87 per cent. The yield had fallen as low as 3.67 per cent Monday before being pushed back up by the stronger-than-expected US ISM services report. A gauge of the dollar gained for the first time in three days.

“The hotter-than-expected ISM services report slowed the bleeding on Wall Street,” said Matt Simpson, a senior market strategist at City Index Inc. “So we’re not seeing a risk-on rally as such, but a healthy correction after an unhealthy selloff, triggered by investors stampeding for a tiny exit.”

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San Francisco Fed President Mary Daly said the labour market is softening and indicated the U.S. central bank should begin cutting interest rates in coming quarters, but stopped short of concluding the jobs market has begun seriously weakening. The swaps market is pricing in a near 50-basis-point Fed rate cut in September.

Back in Asia, the yen fell as much as 1.5 per cent Tuesday, before paring some of its losses. The currency has still gained about 11 per cent this quarter on expectations of further rates hikes by the Bank of Japan.

Japan’s auction of 10-year sovereign notes on Tuesday met the weakest investor demand since 2003 by one measure, as expectations of more rate hikes deterred investors. Traders sold the benchmark bond in the secondary market, unwinding a haven trade during the selloff earlier.

In commodities, oil rose from a seven-month low as a halt in production at Libya’s biggest field refocused attention on the Middle East. Gold steadied after being pulled into Monday’s global rout, when it slumped as some traders cut holdings to cover potential margin calls. Industrial metals found firmer footing, with copper, aluminum and zinc all steady.

Bitcoin inched back to briefly top US$56,000 after steep losses in most major cryptocurrencies Monday.

With assistance from Winnie Hsu, Aya Wagatsuma and Denitsa Tsekova.

Bloomberg.com

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