U.S. Stocks Regain Ground, Yuan Stabilizes

WSJ
Major indexes rebound as investors see potential buying opportunity, bet on further rate cuts.

A weaker yuan makes Chinese goods more competitive abroad, and makes U.S. products and other imports into China more expensive. PHOTO: KIN CHEUNG/ASSOCIATED PRESS

A weaker yuan makes Chinese goods more competitive abroad, and makes U.S. products and other imports into China more expensive. PHOTO: KIN CHEUNG/ASSOCIATED PRESS

U.S. stocks recouped some of their losses Tuesday after China backed off from a further escalation in the country’s trade and currency dispute with Washington.

The Dow Jones Industrial Average, S&P 500 and Nasdaq Composite all rose at least 1.2%, after suffering their worst day of the year Monday as China let the yuan depreciate. Tuesday’s gains were the indexes’ biggest since June and snapped a streak of losses that had been fueled in part by trade anxieties after President Trump threatened to place additional tariffs on Chinese imports.

Investors also dialed back their appetite for less risky assets and sold bonds, pushing yields slightly higher for the first time in five trading sessions. The yield on the 10-year U.S. Treasury climbed to 1.740% from 1.738% a day earlier.

Investors don’t expect market volatility to end without a clear resolution between the U.S. and China. But several said they took advantage of the lull in trade tensions to buy shares depressed by Monday’s selloff. Even with Tuesday’s gains, the S&P 500 is still down 4.8% from the record it hit on July 26, the last day it rose before Tuesday.

What a Weaker Yuan Means for Trade Talks and the Global Economy
What a Weaker Yuan Means for Trade Talks and the Global Economy
The Trump administration called China a currency manipulator after the yuan weakened past the psychologically important level of 7 to the dollar. Here’s what this means for trade talks and the markets. Image: Associated Press

“Moves like Friday and Monday create a buying opportunity for long-term investors,” said Scott Mulford, a Long Island, N.Y., financial adviser who has been suggesting clients “nibble” at stocks.

Mr. Mulford said he recommended clients buy shares of companies that seemed more expensive just a few weeks earlier, such as digital-payment companies like PayPal Holdings and Mastercard . Utilities and real-estate stocks, two areas of the market that have been able to weather recent turbulence and offer better yields than U.S. Treasurys, should also be considered, he added.

The Dow Jones Industrial Average climbed 311.78 points, or 1.2%, to 26029.52 on Tuesday. The S&P 500, meanwhile, added 37.03 points, or 1.3%, to 2881.77 and the Nasdaq Composite rose 107.23 points, or 1.4%, to 7833.27. The Dow’s gain snapped a five-day losing streak for the index, while the S&P 500 and Nasdaq notched their first gains after six consecutive sessions of losses.

The reprieve for investors came after a fraught trading session Monday: U.S. stocks fell hard after China allowed the yuan to fall below the level of seven to the dollar, a psychologically important level. That prompted the Treasury Department late Monday to label the country a currency manipulator.

In the immediate aftermath of the Treasury announcement, U.S. stock futures turned negative and investors raced into Treasurys, threatening to extend Monday’s market ructions. Investors breathed easier, though, when China later Monday night pulled back from a further depreciation of the yuan. That set the stage for Tuesday’s rebound.

Stocks tend to post solid recoveries in the wake of a sharp pullback. Thomas Lee, a managing partner with Fundstrat Global Advisors, said in a note to clients that after past selloffs such as the S&P 500’s 3% decline on Monday, stocks usually bottomed within days and gains over a one-month and three-month intervals averaged 4% and 8%, respectively. Over 15 months, stocks rose an average of 15%, he added.

Last year, the S&P 500 rose nearly 2% on Oct. 25 after falling 3.1% a day earlier because of weaker-than-expected earnings reports. A similar move followed the S&P 500’s Christmas Eve selloff, which knocked the broad index down 2.7%. It rose nearly 5% when exchanges reopened Dec. 26.

“History says this is a buy-the-dip moment,” Mr. Lee said.

The trade fight between the U.S. and China may also prompt the Federal Reserve to step up interest-rate cuts to bolster economic growth in the world’s largest economy, some investors and analysts said. Federal-funds futures, used to wager on the direction of monetary policy, show traders pricing in a 100% probability of another rate cut in September.

“Across currencies and bond markets there’s clearly a greater anticipation for a Fed rate cut given recent developments,” said Geoffrey Yu, head of the U.K. investment office at UBS Wealth Management.

Still, some analysts are warning investors to brace for further spikes in volatility. Trade will remain a key point of contention for as long as the U.S. and China are at odds, and it remains unclear how much the Fed will cut interest rates to support stocks, analysts added.

“We’re not quite all the way through this mini correction, and it could well morph into a 10% correction and wouldn’t surprise me,” said Doug Cohen, managing director of portfolio management at Athena Capital Advisors.

On Tuesday, investors widely bought shares of S&P 500 companies, sending the broad index’s technology, industrial, communication, consumer-discretionary and financial sectors up more than 1%. Even more defensive corners of the market, such as utilities and real-estate stocks, advanced Tuesday.

The gains helped cut month-to-date losses for those sectors, but some, including technology, industrials and financials, remained down at least 3.9%.

Within technology, shares of semiconductor companies, software and hardware makers posted solid advances. Shares of Apple were among the gainers, rising $3.66, or 1.9%, to $197.

Most industrial stocks in the S&P 500 also rose. Aerospace stocks accounted for the biggest gains after components maker TransDigm Group posted better-than-expected earnings and declared a special dividend, sending shares up $63.06, or 14%, to $524.39.

Energy stocks, meanwhile, logged their eighth daily decline out of the past nine trading sessions. They were the only sector to fall on Tuesday. Shares of oil-and-gas companies edged down less than 0.1%, alongside a nearly 2% pullback in crude-oil prices.

The gains in the U.S. followed declines in stocks around much of the world. Major benchmarks in Japan, Hong Kong and South Korea posted declines, while the Stoxx Europe 600 fell 0.5%.

WSJ

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