Recovery After Three-Day Stock Sell-Off: US Stock Futures Rebound

In a remarkable comeback, U.S. stock futures rose after global stocks were battered in a three-day selloff. Concerns about a potential slowdown in the world's largest economy and extreme valuations in the technology sector had unsettled investors. Futures on the S&P 500 Index climbed as much as 1.3% in early Asian trading on Tuesday, while contracts on the Nasdaq 100 increased by 1.8%. Other markets also showed an upward trend, with Japan's Topix Index gaining more than 10% after the yen weakened following a five-day rally against the U.S. dollar. The Topix had lost more than 12% in the previous session. The MSCI All-Country World Index fell by 6.4% over three sessions until Monday. Catalysts for the turbulence included a rise in U.S. unemployment, which raised doubts among investors about whether the Federal Reserve is lowering interest rates quickly enough to avert a recession. Data on Monday also showed that the U.S. services sector rebounded in July after a four-year slump in the previous month, which could alleviate some concerns about an abrupt economic downturn. Mike O'Rourke, Chief Market Strategist at Jonestrading, commented in a report: "The actual stock selloff was relatively mild compared to the panic expressed on social media in the past 24 hours. A correction of 10% or more is absolutely appropriate given this market strength." On Monday, the S&P 500 and the Nasdaq 100 each lost 3%, while the Cboe Volatility Index, also known as the "fear gauge," saw its largest increase since 2018 amid recession fears and a severe plunge in the global artificial intelligence rally. With stocks retreating from recently reached record highs, the question now is how far the current losses will go. Meanwhile, the Bank of Japan's interest rate hike has initiated an unwinding of carry trades, where global traders invest capital borrowed at low interest rates in Japan into higher-yielding assets elsewhere. Some view the impact as limited, and the yen's weakening on Tuesday might offer some relief. Ed Yardeni of Yardeni Research wrote in a report: "A recession in the U.S. is unlikely unless it is triggered by a financial crisis that causes an overall economic recession. Perhaps the tragedy of the carry trades is such a financial crisis and will cause a credit crunch and a recession? We don't think so.