Wall Street recovers ground after trade-war fuelled slump

US markets rallied overnight, regaining some of the losses inflicted after the US-China trade war took a new turn this week.

US markets turned higher on Tuesday as China stabilised its currency after allowing it to depreciate against the dollar in response to President Donald Trump's decision to put more tariffs on Chinese goods. Picture: AP

US stock indexes recouped some of their losses Tuesday after China’s central bank signalled it wouldn’t let the yuan fall much further, steadying a stock market that had been slammed by escalating trade tensions.

The Dow Jones Industrial Average climbed 312 points, or 1.2 per cent, to 26030, trading near its highest point of the session. The S&P 500, meanwhile, added 1.3 per cent, and the Nasdaq Composite rose 1.4 per cent. The Dow’s gains snapped a five-day losing streak, while the S&P 500 and Nasdaq notched their first gains in seven trading sessions.

A lull in geopolitical tensions between the world’s two biggest economies helped put major indexes on track after China’s central bank signalled it wouldn’t let the yuan fall much further.

After a big move downward for stocks to open the week, the US Treasury Department on Monday labelled China as a currency manipulator. China’s signalling after that helped push all three major indexes higher Tuesday.

Although investors don’t expect the volatility to end without a clear resolution between the US and China, several investors said they were taking advantage of depressed stock prices following Monday’s declines, the market’s harshest bout of selling of the year.

“Moves like Friday and Monday creates a buying opportunity for long-term investors,” said Scott Mulford, a Long Island, New York, financial adviser who has been suggesting clients “nibble” at stocks, using the pullback as a chance to buy shares of companies that had seemed more expensive just a few weeks earlier.

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 sell-offs like the S&P 500’s 3 per cent decline on Monday, stocks usually bottomed within days and gains over a one-month and three-month intervals averaged 4 per cent and 8 per cent, respectively. Over 15 months, stocks rose an average of 15 per cent, he added.

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

The trade tensions between the US 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 per cent probability of another 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 UK investment office at UBS Wealth Management.

But analysts and investors don’t see Tuesday’s gains as an end to the market’s latest stumble, and warn investors to brace for further spikes in volatility. Trade will remain a key point of contention for as long as the US and China remain at odds, while 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 per cent 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 stocks all up at least 1 per cent. Even more defensive corners of the market, such as utilities and real-estate stocks, advanced on Tuesday.

The gains helped cut month-to-date losses for those sectors, but some, like technology, industrials and financials all remained down more than 4 per cent.

Within technology, shares of semiconductor companies, software and hardware makers all posted solid advances. Shares of Apple were among the gainers, rising 1.9 per cent.

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 14 per cent.

Energy and material stocks, meanwhile, logged another day of declines. Shares of oil-and-gas companies declined 0.4 per cent, falling aside a 1.7 per cent pullback in crude oil prices. International Flavors & Fragrances led material stocks lower, tumbling 14 per cent, after trimming its sales forecast for the year.

Meanwhile, investors dialled back their appetite for less risky assets and sold bonds, pushing yields up slightly from their multiyear lows. The yield on the 10-year US Treasury climbed to 1.746 per cent from 1.738 per cent a day earlier.

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

With Anna Isaac Major

The Wall Street Journal