Stocks gain after $2trn wipeout; bonds fall

US equities rebounded Tuesday after last week’s rout erased nearly $2 trillion from the S&P 500. Treasuries retreated.

The S&P 500 added 2.7%, led by energy and consumer discretionary shares, while the tech-heavy Nasdaq 100 rose 2.8% following the long weekend. Revlon Inc. gained 66% in the wake of its Chapter 11 bankruptcy filing, Kellogg Co. was up 2.9% after plans to separate into three companies, and a basket of the most-shorted stocks surged as much as 5.5%.

The drop in Treasuries took the benchmark 10-year yield back toward 3.3%.

Sentiment this week is being helped by comments from President Joe Biden that a US recession isn’t “inevitable,” but the outlook remains parlous for investors weighing whether the market has bottomed. History suggests bear markets usually take time to find a floor, especially when they are accompanied by a recession, as happened in 2008’s financial crisis.

Richmond Federal Reserve President Thomas Barkin said the US central bank should raise interest rates as fast as feasible in order to quell rampant inflation.

“We could likely skirt recession, almost touch it but not quite, because we think that the Federal Reserve has become much more sensitive to the effects of their actions on the economy, both in terms of employment and in terms of stability,” John Stoltzfus, chief investment strategist at Oppenheimer, said in an interview. “We’re not out of the woods yet, but we think we’re walking in the right direction.”

After unexpectedly accelerating to a fresh 40-year high in May, US consumer price growth is seen slowing, with a Bloomberg survey of economists predicting 6.5% by the fourth quarter and to 3.5% by the middle of next year.

Yet fears are increasing that Fed policy makers intent on cooling price pressures will go too far and trigger an economic slowdown. Strategists at Morgan Stanley and Goldman Sachs Group Inc. warned equities may have further to fall to fully price in the risk of recession, reflecting wider skepticism about Tuesday’s rebound.

“Central banks are facing a growth-inflation trade-off. Hiking interest rates too much risks triggering a recession, while not tightening enough risks causing unanchored inflation expectations,” strategists at BlackRock Investment Institute including Jean Boivin said in a note. “It’s tough to see a perfect outcome.”

Crude oil gained. Bitcoin scaled $21,000 as cryptocurrencies got a reprieve from recent turbulence. The dollar was little changed and the yen hovered near a 24-year low, sapped by the contrast between a super-dovish Bank of Japan and a hawkish Fed.

European stocks gained for a second day, with automakers leading the advance in the benchmark Stoxx 600 Index.

How will the second half of this year play out for major asset classes? We are re-running MLIV’s 2022 asset survey from December to see how street views have evolved amid the turmoil and volatility in the past few months.

What to watch this week:

Fed Chair Jerome Powell semi-annual Senate testimony, Wednesday
Bank of Japan April minutes, Wednesday
Powell US House testimony, Thursday
US initial jobless claims, Thursday
PMIs for Eurozone, France, Germany, UK, Australia, Thursday
ECB economic bulletin, Thursday
US University of Michigan consumer sentiment, Friday
RBA’s Lowe speaks on panel, Friday

Some of the main moves in markets:

The S&P 500 rose 2.7% as of 2:58 p.m. New York time
The Nasdaq 100 rose 2.8%
The Dow Jones Industrial Average rose 2.4%
The MSCI World index rose 2%

The Bloomberg Dollar Spot Index was little changed
The euro rose 0.2% to $1.0530
The British pound rose 0.2% to $1.2275
The Japanese yen fell 1.1% to 136.51 per dollar

The yield on 10-year Treasuries advanced eight basis points to 3.30%
Germany’s 10-year yield advanced two basis points to 1.77%
Britain’s 10-year yield advanced five basis points to 2.65%

West Texas Intermediate crude rose 1% to $110.65 a barrel
Gold futures fell 0.4% to $1,833.30 an ounce

© 2022 Bloomberg L.P.