Dow Jones rallies for a second day on weaker dollar and bond yields

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Vrasidas Neofytou
Head of Investment Research

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Dow Jones rallies for a second day on weaker dollar and bond yields
U.S. equities started the new month and Q4 quarter on a positive note, rebounding for the second day in a row on Tuesday, as investors increased their appetite for the beaten-down risky assets following the recent weakness in the U.S dollar and Treasury yields.

Lower dollar and bond yields:

The relief rally came as the benchmark 10-year Treasury fell as low as 3.55% yesterday, after having briefly surpassed the 4%-mark on September 28, while the yield on the policy-sensitive 2-year Treasury fell to a 4% key resistance level, after hitting a 20-year high of 4,36% last week.

The falling bond yields have also paused the rally on the U.S. dollar, with the DXY-dollar index falling as low as the 111 mark, for the first time since September 22, providing brief relief to risky assets and the dollar-denominated commodities.

The pullback in the dollar and yields appear to partially reflect market participants’ greater comfort that the Federal Reserve is moving closer to the end of its rate hike cycle, at a time when the market expectations for the Fed’s terminal policy rate for next year have come down from around 4.75% to 4.39%.

Market reaction:

The “oversold” U.S. stocks recorded their best trading day since the end of June on Monday, with most of the indices settling higher as the final quarter (Q4) of the year began. The Dow Jones jumped nearly 2.7%, posting its best day since June 24, the S&P 500 advanced about 2.6% on its best day since July 27, while the tech-heavy Nasdaq Composite increased roughly 2.3%.

Dow Jones index, 1-hour chart

The gains came despite the unexpected decline of the U.S. Purchasing Managers’ Index data for September to the lowest level since May 2020, suggesting a drop in demand for factory-produced goods amid the surging inflation and soaring interest rates.

As for Tuesday, the futures tied to the S&P 500 increased by 1.7%. Nasdaq 100 futures were up 2%, while the futures for the Dow Jones were up 1.5%.

That’s a significant shift from the previous quarter (Q3), and especially the month of September, which saw the major indices notching their biggest monthly losses since March 2020, or down nearly 10%, amid the growing fears of an economic recession brought on by Fed’s rate hikes being implemented too quickly.

For the previous quarter, the Dow Jones fell 6.66% to notch a three-quarter losing streak for the first time since the third quarter of 2015, while both the S&P and Nasdaq Composite fell 5.28% and 4.11%, respectively, to finish their third consecutive negative quarter for the first time since 2009.

Looking at Europe, the pan-European Stoxx 600 climbed 2% in early trade following the overnight rally on Wall Street, with growth-sensitive travel and leisure stocks jumping 4% to lead gains as all sectors and major bourses entered positive territory.

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