Traders Go Risk-On With Dollar Halting Wild Surge: Markets Wrap

(Bloomberg) -- Stocks joined gains in riskier corners of the market, with the dollar slumping after a seemingly unstoppable surge that rattled global currencies and stoked fears of more headwinds for Corporate America.

In a bullish signal, the S&P 500 topped its 100-day average and was set to snap a three-week losing streak. The Nasdaq 100 outperformed. Profitless tech firms, meme shares and Bitcoin all rallied. The greenback pushed away from a record, challenging skeptics who dubbed the drop a correction as calls for a stronger currency were still in place amid tighter Federal Reserve policy.

Traders defied hawkish Fed remarks and recession worries after a rout that drove equities to nearly oversold levels. Citigroup Inc. said the mood was so pessimistic it would indicate a rebound is afoot if there weren’t so many risks ahead. The Levkovich Index, a sentiment gauge, fell to -16 this week, a hair away from the -17 level that defines panic. And Bank of America Corp.’s bull-and-bear indicator slid to the “maximum bearish” level -- often seen as a contrarian buy signal.

“The tug of war between the bull and bear case for markets boils down to the ability of the Fed to tamp down inflation without crushing economic growth, and how much tightening of monetary policy has been effectively priced in,” wrote Art Hogan, chief market strategist at B. Riley. 

Traders almost fully expected another jumbo-sized hike in September, following two 75-basis-point increases. Fed Bank of St. Louis President James Bullard said he was leaning “more strongly” toward a third straight boost of that magnitude. His Kansas City counterpart Esther George noted officials have a “clear-cut” case for continuing to remove monetary support. Fed Governor Christopher Waller said he favors “another significant” increase in rates.

To David Donabedian at CIBC Private Wealth US, this week’s market recovery has shown there is continued resilience in the economy. But he also pointed out that a sustainable bull market would hinge upon three factors falling into place: a belief that the Fed is about done with tightening, a convincing inflation downward trend, and more realistic expectations for corporate earnings.

“Despite the idea that the Fed will kill the economy, we have not seen any signs of that,” said Donabedian. “We have not reached the bottom of the bear-market yet. Indeed, the journey to the next bull market will take time, and will be marked by a series of setbacks and recoveries.”

In fact, data show that investors might still be more likely to sell the dip than buy it. The S&P 500’s performance in 2022 following daily moves of at least 1% in either direction has resulted in the worst next-day performance on record, according to Bespoke Investment Group. This is a stark contrast to 2021, which delivered the best “buy the dip” year since 1963.

US stock funds had outflows of $10.9 billion in the week to Sept. 7, according to EPFR Global data cited by BofA strategists led by Michael Hartnett. They said an “appalling” mode fueled the biggest exodus in 11 weeks, which was led by tech stocks. Global equity funds had outflows of $14.5 billion, while $6.1 billion was poured into government and Treasury bonds.

Looking ahead, markets will be focused on the August consumer-price index report, the last before policy makers decide on rates. While an expected 8% rise in the CPI on the year would suggest inflation is cooling, the core measure that excludes food and fuel is seen accelerating.

Read: Credit Suisse’s Golub Says TIPs Signal Keeps Him Bullish

Meantime, Robinhood Markets Inc. is introducing an index offering a monthly snapshot of the top 100 shares that its users are holding with the most “conviction.” The list includes giants like Tesla Inc., Apple Inc. and Amazon.com Inc. as well as AMC Entertainment Holdings Inc., a meme stock whose volatility has been driven by retail investors.

Elsewhere, Bitcoin rallied the most since July, breaking out of the narrowest trading range in about two years. West Texas Intermediate crude topped $86 a barrel.

Some of the main moves in markets:

Stocks

• The S&P 500 rose 1.6% as of 3 p.m. New York time
• The Nasdaq 100 rose 2.1%
• The Dow Jones Industrial Average rose 1.3%
• The MSCI World index rose 1.7%

Currencies

• The Bloomberg Dollar Spot Index fell 0.6%
• The euro rose 0.5% to $1.0045
• The British pound rose 0.8% to $1.1592
• The Japanese yen rose 1% to 142.67 per dollar

Bonds

• The yield on 10-year Treasuries was little changed at 3.32%
• Germany’s 10-year yield declined two basis points to 1.70%
• Britain’s 10-year yield declined five basis points to 3.10%

Commodities

• West Texas Intermediate crude rose 3.5% to $86.48 a barrel
• Gold futures rose 0.4% to $1,726.80 an ounce

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