Stocks Pause Rally Amid Weak Bond Auction, Market Volatility: Market Update

After an impressive rally spurred by dovish signals from the Bank of Japan, the S&P 500 erased its gains as investors showed tepid interest in the 10-year US bond auction. Despite a pre-sale selloff, demand fell short of expectations, suggesting the recent market surge might be overextended. Treasuries also faced pressure as 17 high-grade issuers, led by Meta Platforms Inc.’s $10.5 billion offering, rushed to sell debt on the busiest day since February.

Mark Hackett of Nationwide describes the recent market movements as a “masterclass” in emotional trading, highlighting how pervasive positive sentiment and positioning can drive market dynamics. “Stocks remain vulnerable,” said Fawad Razaqzada of City Index and Forex.com. “More evidence of a bottom is needed to excite the bulls again. Overall, sentiment remains cautious, with few confident buyers ahead of the upcoming US CPI release next week.”

The S&P 500 hovered near 5,220, with notable losses in Nvidia Corp. and Super Micro Computer Inc. Airbnb Inc. also declined on a weak outlook, while Micron Technology Inc. announced the resumption of its buyback program.

Treasury 10-year yields rose by seven basis points to 3.97%. The Japanese yen fell by 2%, while Mexico’s peso led a rally in emerging markets, alleviating some pressure on currencies previously hit by investors abandoning yen-funded bets on riskier assets. Despite the correction, JPMorgan Chase & Co. strategists see little evidence that equities are oversold as they were in October 2023.

“According to our calculations, for the equity allocation at the global level to return to post-2015 average levels, equity prices would need to decline by another 8% from current levels,” noted Nikolaos Panigirtzoglou and his colleagues in a Wednesday report.

Earlier stock gains were driven by Japan’s reassurances following significant fluctuations in the country’s stock prices over the past week. This movement was exacerbated by expectations that the Federal Reserve might cut rates more aggressively, leading traders to unwind yen-funded carry trades, particularly those involving US tech stocks.

Quincy Krosby of LPL Financial pointed out that the global unwinding of carry trades, triggered by the BOJ’s unexpected hawkish stance, has significantly subsided. “Markets globally have sighed in relief as the pace of unwinding slows, but the yen-dollar relationship remains critical to carry trade dynamics,” she explained. “A softer dollar, driven by market expectations of a Fed easing cycle, should support a stronger yen — negatively impacting carry trades.”

Despite weak US economic data, Franklin Templeton Institute’s Stephen Dover suggests it’s premature to predict an economic downturn. Following a surge in Treasuries, taking some profit is sensible, he said.

Goldman Sachs Group Inc. strategists argue that US Treasury yields remain low absent “broad-based evidence of acute deterioration in the labor market or market function.” William Marshall and Bill Zu note, “The case for a meaningful rally from here is that one or both of these risks materialize. Otherwise, we expect yields to stay above current levels across the curve.”

Will Compernolle of FHN Financial observes that Treasury yields have stabilized from their Monday lows, projecting calm after the week’s initial market turmoil. However, he cautions that it’s too early to declare the chaos over, as yields could decline again during light August trading and a data-light remainder of the week.