U.S. stocks rebound, bond rout eases as Fed rate odds retreat

U.S. stocks rebounded after the biggest rout since June wiped about $500 billion from the value of equities, the dollar fell and Treasuries erased losses as the Federal Reserve’s Lael Brainard remained dovish in her approach to tighter monetary policy. Emerging-market assets slumped.

The S&P 500 Index jumped the most in two months after sinking 2.5 percent Friday, holding gains after Brainard urged “prudence” in removing accommodation. The dollar fell for the first time in four sessions as the odds for a rate hike next week slid to 22 percent. Ten-year Treasuries remained little changed, with yields near 1.68 percent. Shares in Europe and Asia, which were closed Friday when the selloff began, dropped Monday. Emerging-market equities tumbled 2 percent, while oil rebounded past $46 a barrel.

Brainard counseled continued prudence in tightening monetary policy, even as she said the economy is making gradual progress toward achieving the central bank’s goals. Her comments come after financial markets were jolted last week out of a period of calm by an uptick in concern over the outlook for central bank. Brainard, a member of the board of governors, is the last speaker before next week’s Fed meeting.

“It looks like maybe things got out of hand on Friday afternoon without a lot of people around and maybe it’s moderating now,” Andrew Brenner, the head of international fixed income for National Alliance Capital Markets, said by phone. “Stocks, bonds, it’s all connected right now and it all depends on what happens when the Brainard text is released later today.”

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On Friday Boston Fed President Eric Rosengren signaled more willingness to raise interest rates, a day after European Central Bank chief Mario Draghi downplayed the need to add to stimulus.

Stocks
The S&P 500 rose 1.5 percent to 2,159.94 at 3:30 p.m. in New York, rebounding from its worst selloff since June. The move was the first of at least 1 percent since July 8, a streak of 43 consecutive days. Before that, the benchmark had hovered near a record last reached on Aug. 15, amid mixed economic data and speculation about the Fed’s policy on interest rates. The low volatility also propelled investor bullishness to extremely elevated levels, which bodes ill for short-term equity performance, according to Goldman Sachs Group Inc.

The MSCI All-Country World Index of shares fell for a third day, dropping 0.2 percent. All major western-European stock markets slid as the Stoxx Europe 600 Index lost 1 percent, paring a rout that reached 2 percent.

“I’d take this as another of those blips when markets come to terms with less stimulus,” said Kully Samra, a London-based client manager at Charles Schwab Corp., which has $2.7 trillion in client assets. “The market is hooked on any words coming out of the Fed. Some recent economic reports have made people challenge the wisdom of another rate increase this year.”

Brainard, seen as a leading opponent of rate increases for much of the past year, is the last scheduled Fed speaker before the self-imposed blackout period running up to the Sept. 20-21 policy meeting. Any hawkish shift in her rhetoric may stoke volatility in financial markets, which on Friday put the probability of a hike in borrowing costs this month at 30 percent.

The MSCI Emerging Markets Index slid 2.4 percent, the most since June 24. The gauge has slumped 4.2 percent in two days, poised for a one-month low. The Hang Seng China Enterprises Index of mainland companies listed in Hong Kong sank 4 percent, the most in seven months, and South Korea’s Kospi lost 2.3 percent.

Treasuries fluctuated, with the yield on 10-year notes holding near 1.68 percent. The rate jumped 13 basis points in two days last week to end at the highest since June. The government will sell a combined $44 billion of three- and 10-year notes.

Germany’s 10-year yield climbed three basis points to 0.04 percent, and touched the highest level since June 24. Spanish bonds with a similar maturity dropped a fourth day, pushing the yield to the most in seven weeks.

“Growth is low and going to stay low and inflation is not really a problem,” Charles Diebel, London-based head of rates at Aviva Investors said in a Bloomberg TV interview with Manus Cranny and Nejra Cehic. “That’s not an environment where bonds get destroyed. It may be that their valuations are relatively rich and we’re experiencing a correction, but we’re not talking about the start of a huge bear market.”

Japanese government bonds with maturities of less than a decade advanced and longer-dated securities declined. The moves follow a Reuters report on Friday that said the Bank of Japan was studying options to steepen the nation’s yield curve.

Commodities

The Bloomberg Commodity Index rose 0.3 percent, after sliding 1.3 percent on Friday. Crude oil rebounded from losses of more than 1.5 percent to rise $1.1 percent to $46.40 a barrel in New York.

Gold slipped 0.5 percent to $1,327.90 an ounce in New York. Other metals declined as investors waited for signs on U.S. interest rates from Brainard.

Nickel slid 3 percent in London, dropping for the first time in eight days, while tin tumbled by the most since May. Iron ore fell in China to the lowest since June amid speculation the nation’s policy makers will tighten property curbs and so cool demand for steel.

Currencies

The Bloomberg Dollar Spot Index fluctuated near a one-week high before Brainard’s speech. The dollar showed little reaction to comments from the Fed chiefs for Atlanta and Minneapolis.

Dennis Lockhart repeated his call for a “serious discussion” about raising interest rates, even after some recent disappointing economic indicators, while Neel Kashkari said in an interview on CNBC that he doesn’t see any urgency to do anything.

The yen gained, paring a two-day drop, as the selloff in stocks and commodities spurred demand for the relative safety of Japan’s currency. The yen advanced 0.6 percent to 102.04 per dollar, after falling almost 1 percent over the past two days. The euro was little changed at $1.1223.

The MSCI Emerging Markets Currency Index slid 0.6 percent, leaving it down 1.3 percent over two days. The Mexican peso tumbled to a 2 1/2-month low. Financial markets in Singapore, Malaysia, Indonesia, Turkey and the Middle East were among those closed for holidays.

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