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(Bloomberg) — A rapid slide in US stocks after a weak $42 billion sale of Treasuries underscored the fragility of markets in the wake of historic volatility that rattled the financial world.
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Following a surge of almost 2% driven by the Bank of Japan’s dovish signals, the S&P 500 wiped out its gains. Investors shunned the 10-year US bond auction — despite a pre-sale selloff — as weaker-than-expected demand offered a signal that the recent rally may have run its course. Treasuries also came under pressure as 17 high-grade issuers rushed to sell debt in the busiest day since February. Meta Platforms Inc. kicked off the deal deluge, with a $10.5 billion offer.
At Nationwide, Mark Hackett says the latest events have been a “masterclass” in how emotions can dominate the movement in markets, particularly when sentiment and positioning are nearly universally positive.
“Stocks remain vulnerable,” said Fawad Razaqzada at City Index and Forex.com. “More evidence of a bottom is needed to excite the bulls again. Overall, sentiment remained cagey. Not many people were confident to buy this latest dip, especially with US CPI looming next week.”
The S&P 500 hovered near 5,220. Nvidia Corp. led losses in megacaps. Super Micro Computer Inc. tumbled on disappointing earnings. Airbnb Inc. sank on a weak outlook. Micron Technology Inc. is resuming a buyback program.
Treasury 10-year yields rose seven basis points to 3.97%. The Japanese yen fell 2%. Mexico’s peso led a rally in emerging markets, easing pressure on currencies that had been hammered as investors abandoned yen-funded bets on riskier assets.
Despite the correction, strategists at JPMorgan Chase & Co. say there’s little evidence that equities entered oversold territory like in October 2023, for example.
“On our calculations for the equity allocation at the global level to return to post-2015 average levels, equity prices would have to decline by a further 8% from here,” Nikolaos Panigirtzoglou and his colleagues wrote in a note Wednesday.
Earlier gains in stocks were fueled by Japan’s reassurance on the heels of massive swings in the country’s stock prices over the past week. The moves were compounded by the view the Federal Reserve would cut rates more aggressively, prompting traders to rapidly unwind once-popular yen-funded carry trades — including crowded positions in US tech stocks.
The global unwinding of the carry trade triggered by the BOJ surprisingly more hawkish stance last week – that in turn strengthened the yen markedly – has eased considerably, according to Quincy Krosby at LPL Financial.
“Markets globally have felt a sigh of relief as the velocity of the unwinding eases, but the yen’s relationship to the dollar is also a key component of the carry trade calculus,” she noted. “A softer dollar, driven by the markets perception that the Fed will soon initiate an easing cycle, should help support a stronger yen — a negative for the trade.”
Markets have been in a tailspin due to recent weak US data, but it’s still too soon to suggest the economy is heading for a downturn, according to Franklin Templeton Institute. After a surge in Treasuries, “it makes sense” to take some profit, Stephen Dover wrote.
US Treasury yields are probably too low in the absence of “broad-based evidence that an acute deterioration is underway in either the labor market or in market function,” according to strategists at Goldman Sachs Group Inc.
“The case for a meaningful rally from here is that one (or both) of those risks materialize,” William Marshall and Bill Zu wrote. “Under more benign outcomes, we think the center of gravity for yields is likely to be above current levels across the curve, in relative parallel versus the forwards.”
To Will Compernolle at FHN Financial, Treasury yields are now comfortably higher than their Monday lows, projecting a sense of calm after financial markets went haywire at the beginning of this week.
“It’s too early to declare the chaos over, however, and Treasury yields could veer back lower during light August trading and a relative data vacuum the rest of this week,” he said.
Corporate Highlights:
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Walt Disney Co. gave a mixed picture as it reported third-quarter results on Wednesday, with weakness at its famed theme parks offsetting its first-ever profit in streaming.
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Shopify Inc. reported second-quarter sales and profit that beat analysts’ estimates, showing that the Canadian e-commerce company is managing to navigate cautious consumer spending.
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CVS Health Corp. lowered its 2024 earnings outlook for the third straight quarter and announced cost-cutting measures to save $2 billion over several years as health-care expenses continue to soar.
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Ride-hailing company Lyft Inc. posted second-quarter bookings and issued an outlook that fell short of Wall Street’s expectations.
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Boeing Co. is redesigning the fuselage component that blew out of a nearly new 737 Max 9 aircraft mid-flight in January, as the planemaker seeks to draw lessons from the accident that has thrown it into crisis.
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Novo Nordisk A/S reported disappointing sales of its blockbuster weight-loss treatment Wegovy, a rare setback for the Danish drugmaker as it braces for more competition in the booming market.
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Rivian Automotive Inc. is sticking with a full-year vehicle production target unchanged from last year, but its chief executive officer expects output to grow in 2025 even with a plant shutdown looming.
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Brookfield Asset Management Ltd. said its assets under management rose to a record of approximately $1 trillion, and it reported profit that increased from a year ago but still missed analysts’ expectations.
Key events this week:
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Germany industrial production, Thursday
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US initial jobless claims, Thursday
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Fed’s Thomas Barkin speaks, Thursday
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China PPI, CPI, Friday
Some of the main moves in markets:
Stocks
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The S&P 500 fell 0.3% as of 3:14 p.m. New York time
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The Nasdaq 100 fell 0.5%
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The Dow Jones Industrial Average fell 0.4%
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The MSCI World Index was little changed
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Bloomberg Magnificent 7 Total Return Index fell 0.7%
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The Russell 2000 Index fell 1%
Currencies
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The Bloomberg Dollar Spot Index rose 0.1%
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The euro was little changed at $1.0924
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The British pound was little changed at $1.2694
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The Japanese yen fell 1.8% to 146.94 per dollar
Cryptocurrencies
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Bitcoin fell 2.7% to $55,022.94
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Ether fell 5.5% to $2,353.41
Bonds
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The yield on 10-year Treasuries advanced seven basis points to 3.97%
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Germany’s 10-year yield advanced seven basis points to 2.27%
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Britain’s 10-year yield advanced three basis points to 3.95%
Commodities
This story was produced with the assistance of Bloomberg Automation.
–With assistance from Robert Brand, Sujata Rao and Winnie Hsu.
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