Asian Stocks to Resume Drop in Rollercoaster Trade: Markets Wrap

(Bloomberg) — Stocks in Asia are set to resume declines following a frenzy of dip buying that fueled a rebound in most markets across the globe on Tuesday. US futures fell in early trading.

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Equity futures pointed to drops in Tokyo and Sydney, though Hong Kong was set to gain after four days of losses. The S&P 500 and Nasdaq 100 rose on Tuesday — following a Japanese-led rebound in Asia — with both climbing 1% as buyers scooped up bargains after a rout that shook markets around the world. Wall Street’s “fear gauge” — the VIX — saw its biggest plunge since 2010.

“We would characterize the recent market pullback as a textbook correction, after months of low volatility so far in 2024,” said Carol Schleif at BMO Family Office. “The lack of volatility before the past few weeks is unusual, and our current correction is actually quite normal, especially during August, which historically is a volatile time for markets given lighter trading volumes and the summer doldrums.”

As demand for haven assets waned globally, Treasuries fell. A $58 billion auction of three-year notes saw solid demand. Traders are also moderating expectations of deep Federal Reserve rate cuts this year. Swaps point to around 105 basis points of easing, compared to as much as 150 basis points on Monday.

“The Fed worries about systemic risk in financial markets, not disappointed investors,” said David Donabedian at CIBC Private Wealth US. “Thus, the Fed is unlikely to change its course of action due to a stock market correction. Are we headed for a near term recession, or are markets overreacting? We believe slower growth is unfolding, not a recession.”

The S&P 500 rose to 5,240. Nvidia Corp. jumped 3.8% to lead gains in chipmakers. Both the “Magnificent Seven” gauge of megacaps and the Russell 2000 of small firms added 1.2%.

Treasury 10-year yields jumped 10 basis points to 3.89%, while Australia’s equivalent rose 5 basis points early Wednesday. The Japanese yen slipped after a recent surge that saw an unwind of popular carry trades, and the New Zealand dollar strengthened after the jobless rate rose less than expected. Oil fell after an industry report indicated a buildup in US inventories after five weeks of declines.

A semblance of calm returned to markets on Tuesday, following a pullback fueled by weak economic data, underwhelming tech results, stretched positioning and poor seasonal trends. The wall of worry the market built up over the past few days drove the S&P 500 to the brink of a correction, with a drawdown of about 8.5% from the highs.

While such sharp declines in equity prices are concerning, historic data show “dips, pullbacks and corrections of 10% or more” are a normal and healthy part of any bull market, according to George Smith at LPL Financial.

Roughly 94% of the years since 1928 have experienced a pullback of at least 5%, and 64% of years have had at least one 10% correction, he noted.

“We believe that how common these occurrences are should provide comfort to equity investors, allowing them to be patient, stay invested, and most importantly, to not panic,” Smith said.

There have been 354 such days since 1928 when the S&P 500 was down 3% or more, and the average (and median) three-month, six month and one year forward returns are all higher than long-term averages, Smith at LPL noted.

“Excesses are burned off. It doesn’t feel good, but it’s a healthy part of the process,” said Ben Kirby at Thornburg Investment Management.

To Lauren Goodwin at New York Life Investments, evidence against the prevailing “soft landing” view has forced the market to catch up to reality, but there’s not enough evidence to merit panic selling and an emergency acceleration of interest rate cuts.

“Get used to the volatility,” said Savita Subramanian at Bank of America Corp. “The best hedge is owning high quality stocks (we use earnings and dividend stability as our key measure). Market tranches based on quality have a well-behaved relationship with the VIX – the highest quality stocks tend to outperform as the VIX rises while the lowest quality stocks tend to lag the most.”

Long-term investors don’t need to worry about short-term gyrations, said Michael Sansoterra at Silvant Capital Management.

“It’s good to have these washouts on occasion,” he said. “They keep investors honest.”

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