Stocks extended their rebound from deeply oversold levels, with traders weighing whether it would be realistic that central banks moderate their aggressive stance to prevent a hard landing.
(Bloomberg) — Stocks extended their rebound from deeply oversold levels, with traders weighing whether it would be realistic that central banks moderate their aggressive stance to prevent a hard landing.
The S&P 500 had its best two-day surge since April 2020. Tesla Inc. climbed even after Elon Musk revived his $44 billion bid for Twitter Inc., which soared 22%. On top of the equity short squeeze, soft economic data gave bulls a glimmer of hope when it comes to policy. US job openings sank to a 14-month low — which may fit well with a Federal Reserve that’s worried about a hot labor market. The dollar slumped.
The debate over peak hawkishness intensified after a dovish surprise from Australia’s central bank and bond buying by the Bank of England. The idea of a Fed pivot, however, has been met with a lot of skepticism in Wall Street — with top US officials warning that the battle against inflation will require more time.
Read: Fed Telegraphs No Aussie-Style Policy Pivot in Inflation Battle
So when it comes to the explanation for the rally in stocks, traders generally prefer to stick with the idea that pessimism reached such extreme levels that a bounce would be just a matter of when.
For markets that had been “nearly one-sided,” the liquidation of those positions is a big reason to squeeze in the other direction so vigorously, said Fawad Razaqzada at City Index and Forex.com.
“While it ‘feels’ like the markets may have bottomed out — which is certainly a possibility, a small possibility, but a possibility nonetheless — it is important to not get caught in another bull trap,” Razaqzada noted. “We are still in a bear market, and this could just turn out to be another relief rally.”
In fact, after raising bearish wagers in one of the longest stretches in years, short sellers are being forced to fold. At the center of the rally are most-shorted stocks, as tracked by Goldman Sachs Group Inc., which jumped over 6.5% Tuesday, handing losses for those who had placed bets against them.
Short squeeze has indeed been big factor behind the rebound in equities, but it’s not like traders are minimizing the potential impact of the recent economic reports on Fed thinking. Tuesday’s jobs data could reinforce the case for officials to get off the “hamster wheel” of 75 basis points sooner rather than later, said Evercore’s Peter Williams.
That doesn’t mean any pivot would be imminent. Markets are still mostly betting on a hike of that magnitude next month.
“In short, we’re starting to see some things the doves can hang their hat on, but I don’t think it will be enough to stop another 75bp move in November,” wrote Neil Dutta, head of economics at Renaissance Macro Research. “All eyes on Friday payrolls.”
Lindsey Bell, chief markets and money strategist at Ally, says the bets are on a “goldilocks” labor-market report that’s “not too hot and not too cold.”
“For the market to continue higher, the jobs data will have to be in-line with, or short of expectations,” she added.
Elsewhere, oil surged for a second day as OPEC+ said it was considering an output cut of as much as 2 million barrels a day, a million barrels higher than previously anticipated.
Key events this week:
- Eurozone services PMIs, Wednesday
- OPEC+ meeting begins, Wednesday
- Fed’s Raphael Bostic speaks, Wednesday
- The Reserve Bank of New Zealand meets, Wednesday
- Eurozone retail sales, Thursday
- US initial jobless claims, Thursday
- Fed’s Charles Evans, Lisa Cook, Loretta Mester speak at events, Thursday
- US unemployment, wholesale inventories, nonfarm payrolls, Friday
- BOE Deputy Governor Dave Ramsden speaks at event, Friday
- Fed’s John Williams speaks at event, Friday
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Some of the main moves in markets:
Stocks
- The S&P 500 rose 3.1% as of 4 p.m. New York time
- The Nasdaq 100 rose 3.1%
- The Dow Jones Industrial Average rose 2.8%
- The MSCI World index rose 3.3%
Currencies
- The Bloomberg Dollar Spot Index fell 1%
- The euro rose 1.7% to $0.9989
- The British pound rose 1.3% to $1.1474
- The Japanese yen rose 0.4% to 144.03 per dollar
Cryptocurrencies
- Bitcoin rose 3.1% to $20,214.08
- Ether rose 2.4% to $1,355.1
Bonds
- The yield on 10-year Treasuries was little changed at 3.63%
- Germany’s 10-year yield declined five basis points to 1.87%
- Britain’s 10-year yield declined nine basis points to 3.87%
Commodities
- West Texas Intermediate crude rose 3.1% to $86.25 a barrel
- Gold futures rose 1.9% to $1,734 an ounce
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