- US stock markets rebound by 5% as mood turns risk-on, and amid thin liquidity
- Dollar climbs while the defensive yen crumbles, but sentiment reversing again today
US stock indices surge by 5%, but is the broader sell-off over?
The latest bout of stock market volatility remained in full force on Wednesday. The major US indices posted outsized gains, with the likes of the S&P 500 and the Dow Jones both jumping by almost 5.0% to recover some of their latest losses. Asian markets followed suit. There was little in terms of fresh catalysts behind this astounding rebound, other than news that US and Chinese officials will meet soon for talks. Instead, it may have been owed mainly to the recent sell-off being a little overdone, coupled with end-of-year portfolio rebalancing by major funds, and likely exacerbated by thin liquidity conditions as well as several speculators having to cover their prior short positions.
The question on everyone’s mind is whether this is the beginning of a sustained recovery for these battered indices, or whether it’s merely a one-off bounce in the context of a broader bear market. On balance, this looks more like the latter, considering that the broader narrative – of a looming slowdown in economic growth and corporate profits – has not changed one iota. Rather, the real question may be at what levels do valuations reach attractive enough levels to lure “bargain” investors back in, and thereby halt the broader rout.
Dollar rallies alongside equities as yen gets crushed
In the FX market, the remarkable recovery in risk appetite translated into weakness for the Japanese yen and Swiss franc, given their status as safe-haven assets. Meanwhile, the US dollar was the biggest beneficiary, advancing against almost all of its counterparts as the yields on longer-dated US bonds climbed higher, enhancing’s the reserve currency’s carry appeal. Specifically, dollar/yen climbed by roughly 100 pips, though it’s giving up some of those gains early on Thursday.
In commodity markets, oil prices rallied by roughly 8%, with both WTI and Brent establishing some distance from their recent lows. Meanwhile, gold retreated after touching its highest level since June – of $1278 per ounce – as a resurgent greenback rendered the dollar-denominated metal less attractive for investors using foreign currencies.
Day ahead: US and Japanese data to highlight a rather quiet session
The economic calendar remains relatively light on Thursday. In the US, new home sales for November and the CB consumer confidence index are due for release. Note that while neither of these is usually a major market mover, they could attract extra attention for any clues as to whether the US economy continues to slow, and any market reaction may be amplified by thin liquidity.
In Japan, the Tokyo CPIs for December are due out at 2330 GMT, alongside the nation’s employment data for November. Preliminary industrial production and retail sales figures for the same month are also due twenty minutes later, at 2350 GMT. The BoJ summary of opinions from the latest policy gathering, where the Bank kept its policy unchanged, will also be made public.
