US stocks rebound after rout

US stocks surged higher overnight, bouncing back as worries eased about the prospect of an early US rate rise.

Wall Street’s recovery came after its biggest declines since the UK voted to leave the European Union. Pic: AP

US stocks climbed overnight, rebounding in the wake of Friday’s rout that ended two months of summer calm.

The Dow Jones Industrial Average rose 240 points, or 1.3 per cent, to 18325 and the S & P 500 rose 1.5 per cent after their biggest declines since the UK voted to leave the European Union. The Nasdaq Composite gained 1.7 per cent.

Meanwhile European stock markets slumped, spooked by the prospect of a US interest rate hike as early as this month, and mirroring earlier falls in Australia and Asia.

The US recovery came after the Dow industrials and the S & P 500 closed at their lowest levels since July 7 on Friday, down roughly 3 per cent from their records, amid investor concerns that central banks around the world were running out of willingness or ability to prop up markets. The S & P 500 overnight notched its biggest gain since July 8.

Investors weighed comments from various Federal Reserve officials ahead of the central bank’s self-imposed blackout period, which begins Tuesday, ahead of their next policy meeting September 20-21. While statements last week raised concerns that the Fed could tighten policy faster than expected, some of those worries abated overnight.

“You saw today they started walking back the rate hike a little bit, and that allowed the market to recover from Friday’s steep drop,” said Bruce Bittles, chief investment strategist at Robert W. Baird.

Fed Governor Lael Brainard pushed in a speech overnight for “prudence in the removal of policy accommodation,” arguing that improvement in the labour market hasn’t had the desired effect on inflation. Ms Brainard joined the Fed board just over two years ago, and has emerged as a voice favouring a go-slow approach on raising interest rates.

Those remarks came after Federal Reserve Bank of Boston President Eric Rosengren on Friday heightened expectations for an interest rate rise later this year. Federal Reserve Bank of Atlanta President Dennis Lockhart, a centrist seen as aligned with Fed Chairwoman Janet Yellen, said overnight that economic conditions warrant debate about raising rates at the central bank’s meeting next week, adding officials don’t face an urgent need to act immediately.

Several traders and analysts said Fed officials hadn’t significantly altered rate increase expectations and central bank concerns provided an excuse for some investors to move from positions acquired as major US indexes climbed to record highs this summer.

Stocks that pay high dividends and are sensitive to interest rate changes were among the biggest gainers Monday, after leading Friday’s declines. Shares of telecommunications companies in the S & P 500 rose 2 per cent. Utility stocks climbed 1.7 per cent. Wal-Mart Stores rose 2.3 per cent to lead the Dow industrials. Procter & Gamble also gained 2.3 per cent.

Fed funds futures, used by investors to bet on central bank policy, suggested a roughly 15 per cent chance of a rate rise in September, down from 24 per cent on Friday, according to CME Group.

The yield on the benchmark 10-year US Treasury note was 1.671 per cent overnight, according to Tradeweb, essentially unchanged from Friday. Ten-year Japanese government bond yields settled at 0.013 per cent, having spent most of the year in negative territory. Yields rise as prices fall.

Friday’s sell-off shattered weeks of relative calm in US markets. Stock-trading volume was the highest since the end of June, with roughly 8.3 billion shares changing hands, above average for the month and the year. The CBOE Volatility Index, or VIX, which tracks investors’ expectations for volatility in stocks, surged 40 per cent on Friday.

Many investors also remain disappointed by the European Central Bank’s decision on Thursday not to ease policy further at its most recent meeting. German 10-year bond yields climbed to 0.038 per cent, according to Tradeweb.

“Central banks get most of the credit for the calm and upward-moving market over the summer, but I don’t think we can depend on that going forward,” said Jeff Layman, chief investment officer at BKD Wealth Advisors.

London’s FTSE 100 closed down 1.1 per cent, Frankfurt ended 1.3 per cent weaker and Paris slipped 1.2 per cent.

The Stoxx Europe 600 shed 1 per cent, while Hong Kong’s Hang Seng index fell 3.4 per cent in its worst day since February. Markets in Shanghai, Japan and Australia all closed with losses of around 2 per cent.

The dollar fell 0.9 per cent against the yen to Yen101.82, while the euro gained less than 0.1 per cent against the dollar at $1.124, according to FactSet.

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