A look at the day ahead in U.S. and global markets from Mike Dolan
The speed and scale of Tuesday's 10% Tokyo bounce after its worst day in 37 years suggests the wild global market swings of the past week are more rooted in speculative churn than economic fright.
While that's only partly reassuring - as persistent market turbulence can itself sap economic activity - there's good reason to believe a slowing U.S. labor market and factory sector do not automatically presage recession. July service sector readings show other parts of the economy are doing just fine.
Any worries about employment weakness through next year should be tempered by the fact the Federal Reserve seems ready to take its foot off the brake and support the expansion. Chicago and San Francisco Fed chiefs on Monday said all options were now on the table for the central bank.
Which leaves investors pondering the real cause of the truly hair-raising moves in market prices since last Wednesday - which saw the VIX 'fear index' of stock volatility jump by its most in one day to its third-highest peak ever.
LOW-VOLATILITY TRADES BUILD
The finger points squarely at the build-up of low-volatility trades, variously involving currency 'carry' plays funded by Japan's yen, short positioning in stock options and even Treasury futures arbitrage involving leveraged 'basis trades'.
Those trades had built a head of steam during a period of peculiarly calm markets, which had seen the S&P 500 go 356 sessions without a 2% drop until last Wednesday. Yesterday it recorded its second such drop in a week.
All flushed out? Probably not, but the boil may have been lanced at least and allow a more fundamental examination of the state of markets while a holiday-thinned August plays out.
The 10% bounceback in Tokyo's Nikkei 225 - after Monday's 12% drop aped the worst day of the 1987 crash - showed how quickly things can calm as the yen cooled even without much new information.
Having plunged more than 8% in a week to its lowest since January, the dollar/yen exchange rate has bounced back from Monday's trough under 142 to more than 144 today.
The VIX, meantime, has almost halved again from Monday's peaks above 65 and hovered about 34 before Tuesday's bell.
Recalibrating slightly panicked Fed easing bets since the weak July payrolls print on Friday, U.S. fixed income markets also found a level. Futures markets now see about 112 basis points of Fed cuts by year-end, compared to more than 130bp at one point a day earlier.
Ahead of Tuesday's $58 billion 3-year note sale and 10-year auction on Wednesday, 10-year Treasury yields regained a foothold above 3.8% compared with a low of 3.66% a day ago, and the 2-to-10 year yield curve stayed inverted after Monday's brief pop positive.
The dollar index perked up, while the Swiss franc fell back and bitcoin caught a toehold, too.
Bruised Wall St stocks saw futures back in positive territory - with gains of more than 0.5% across the S&P500,.
VOLATILITY
What now?
The still-high level of implied volatility means big market swings are likely until full calm is restored - but attention will refocus quickly on underlying economic and earnings readouts.
A resumption of the busy earnings diary may be first port of call, with Super Micro Computer (NASDAQ:SMCI) out on Tuesday to test the recently wobbly reception for AI developments, and other household tech names like Uber (NYSE:UBER) and Airbnb are up alongside energy firms and industrial giant Caterpillar (NYSE:CAT).
On the broader economy, the soundings through the second quarter at least continue to show little sign of the sort of sudden economic heart attack suggested by recent market moves.
U.S. banks reported no change in demand for commercial and industrial loans in the most recent quarter, the strongest showing on that measure in two years, according to a Fed survey of senior loan officers published late on Monday.
And in the middle of frenetic rate cut speculation around the world, Australia's central bank ruled out a cut this year, saying core inflation is expected to come down only slowly after it held interest rates steady for a sixth straight meeting.
Key developments that should provide more direction to U.S. markets later on day:
* US June international trade, Canada June international trade. New York Fed's Q2 Household Debt and Credit Report; New York Fed's global supply chain pressure index for July
* US corporate earnings: Super Micro Computer, Amgen (NASDAQ:AMGN), Caterpillar, Uber, Airbnb, Mosaic, Fox, Wynn Resorts (NASDAQ:WYNN), Molson Coors (NYSE:TAP) Beverage, Assurant (NYSE:AIZ), Progressive, Fortinet (NASDAQ:FTNT), Marathon, Duke Energy (NYSE:DUK), Devon Energy (NYSE:DVN), Constellation Energy, Sempra, Vulcan, DaVita (NYSE:DVA), Kenvue (NYSE:KVUE), Zoetis (NYSE:ZTS), International Flavors & Fragrances (NYSE:IFF), Henry Schein (NASDAQ:HSIC), Axon, Baxter (NYSE:BAX), Jacobs Solutions, STERIS, Fidelity National Information Services, Trimble, IDEXX, Yum! Brands (NYSE:YUM), etc
* US Treasury sells $58 billion of 3-year notes, $46 billion of 12-month bills