After a volatile session in North America, the major equity indices closed higher. In fact, the 1.75% rise in the S&P 500 was the best since November 2016. Asian equities stabilized, and the MSCI Asia Pacific Index was able to eke out a small gain. The European markets are moving higher is also posting early gains and the Dow Jones Stoxx 600 is about 0.45%, which threatens to snap the seven-day slide. However, the main challenge now is that the S&P 500 are trading nearly 1% lower.

There were two main exceptions to the equity recovery in Asia: China and Korea. Chinese markets opened higher, but the Shanghai Composite finished off 1.8% lower, with banks, insurers, and property developers leading the way. An index of Shanghai’s 50 largest stocks closed nearly 3% lower, while a small cap index gained 1.1%. In Korea, foreign investors were net sellers like on Tuesday (sold KRW226 bln today after selling KRW280 bln yesterday), but the big difference was domestic investors. They were net buyers of near KRW108 bln on Tuesday but sold KRW529 bln today.

The stabilization of equities is not weighing on bond yields today. In fact, the US 10-year yield is has been turned back after rebounding to 2.80% yesterday. It is off four basis points in the European morning. Investors are returning to the periphery of Europe where Spanish and Italian 10-year benchmark yields are off four-five basis points, while Portugal’s leading the way with a nearly nine basis point decline. 

Before the equity market disruption, we had thought that pendulum of market psychology swung too far against the dollar. Sentiment and positioning seemed extreme. We also did not think market participants were giving sufficient due to the US fundamentals, and in particular, the widening interest rate differential and the favorable policy mix of fiscal stimulus and tighter monetary policy.

Yesterday, before the S&P 500 found a base, the euro approached its 20-day moving average (~$1.2300) that had offered support since the end of last year, and in so doing penetrated last week’s lows (~$1.2335) intraday. The euro is firmer today, but the technical indicators have turned (e.g. MACDs and Slow Stochastics), and we expect offers to re-emerge in the $1.2400-$1.2440 area.