US stocks posted their sharpest rally of the year on Monday, as investors sought out bargains a day after Wall Street’s worst performance in four years on fears China’s economy was slowing.
Markets also got a shot of good news with China’s second interest rate cut in two months.
The Nasdaq composite index led the way with a 3.2 percent rise, boosted by Apple’s 5.7 percent gain to $108.96. The stock slumped as much as 13 percent on Monday.
Analysts were cautious, however, and even with Tuesday’s gains, the Dow and the S&P were on track for the their worst monthly losses since February 2009, while the Nasdaq was poised for its steepest monthly fall since November 2008.
“Today’s rally can be attributed to value hunters who are slowly moving into the market as valuation levels now seem reasonable,” said Terry Sandven, chief equity strategist at U.S. Bank Wealth Management in Minneapolis, while warning that a “wall of uncertainty” about global growth remains.
The move by China’s central bank came after Chinese stocks slumped 8 percent on Tuesday following an 8.5 percent drop on Monday.
“What we need to see to calm investors is positive economic data points out of China and only when we see that will the rallies be sustainable,” said Xavier Smith, investment director at Centre Asset Management.
“Right now, it’s pretty meaningless,” he said of the interest rate cut.
On Monday, the Dow Jones industrial average briefly slumped more than 1,000 points – its steepest intraday fall ever – and the S&P 500 recorded its worst day since 2011.
At 11:11 a.m. ET (1511 GMT) the Dow Jones industrial average was up 362.84 points, or 2.29 percent, at 16,234.19, the S&P 500 was up 46.47 points, or 2.45 percent, at 1,939.68 and the Nasdaq Composite was up 144.35 points, or 3.19 percent, at 4,670.60.
All 10 major S&P sectors were higher, with the technology index’s 2.52 percent rise leading the advancers. U.S. banks rose, with Bank of America up 4.8 percent at $16.02.
Oil prices were up about 3 percent, bouncing back from heavy losses on Tuesday, but was still below $40 per barrel.
New U.S. single-family home sales rebounded in July and consumer confidence increased to a seven-month high in August, pointing to underlying strength in the economy that could still allow the Federal Reserve to raise interest rates this year.
Traders now see a 26 percent chance that the Fed would increase rates in September, up from 22 percent on Monday, according to overnight indexed swap rates.
The dollar, which fell to a 7-month low against a basket of currencies on Monday, was up more than 1 percent.
Disney was up 3.1 percent at $98.37.
Best Buy jumped 12.9 percent to $33.12 after the owner of the biggest U.S. electronics chain reported an unexpected increase in quarterly sales.
Advancing issues outnumbered decliners on the NYSE by 2,501 to 515. On the Nasdaq, 2,136 issues rose and 623 fell.
The S&P 500 index showed one new 52-week high and three new lows, while the Nasdaq recorded seven new highs and 48 new lows.
Europe blue-chip shares on the cheap? Think again
Stock markets are rebounding after a bruising 48-hour sell-off. But with China still battling to revive its slowing economy, Europe’s “screaming buys” come with risks.
There is no doubt the recent correction has created opportunities. Even taking into account the 4.5 percent jump in the STOXX Europe 600 index on Tuesday, European stocks are still down 14 percent from this year’s peaks and trade at a discount to the U.S. S&P 500 and Japanese Nikkei.
But while the U.S. had its “Apple at $99” opportunity during the worst of Monday’s rout, when the world’s biggest company hit its lowest level in almost a year, finding a safe haven in big European names like Nestle or Unilever is proving trickier.
For a start, the engine of growth for these global companies in recent years has been emerging markets – precisely where economic growth is faltering and triggering market fears of fresh deflationary pressures.
Six European sectors, including food and beverages, autos and chemicals, derive more than 15 percent of their revenue from the Asia-Pacific region and have delivered the worst relative total returns since Aug. 5, according to Citi research.
Fund managers and strategists said the better buys were stocks and industries more exposed to a domestic recovery.
“Some of the consumer staples considered to be defensive have quite significant exposure to China … They aren’t necessarily a sanctuary,” said Rory Powe, manager of the Man GLG Continental Europe fund, which has 174 million pounds ($275 million) under management.
Powe said a company such as Fielmann, a German spectacles maker with a market value of 4.6 billion euros ($5.27 billion), was an example of a better bet in the long run.
Valuation is another issue. Many of Europe’s blue chips on the STOXX Europe 50 index trade at a premium to the broader market, including oil company Total, consumer-goods maker Unilever, British American Tobacco and brewer Anheuser-Busch Inbev.
Credit Suisse strategists recommended clients buy telecom stocks for dividends and cash flow and also backed employment agency Adecco, Southern European banks like Intesa Sanpaolo and Germany’s SAP. They warned against consumer staples’ valuation and emerging-market focus.
While top blue chips are no slouch in terms of dividend yield – the STOXX Europe 50 yields around 4.3 percent – Goldman Sachs strategists warned they came with risks.
“(There is) the possibility that investors will hide in the perceived safety of defensive “bond proxies” and consumer staples in particular … it should be stressed that many of the companies in these sectors have high emerging-markets exposure and are seeing a slowdown in earnings (growth),” they said.
Among the beneficiaries of the rebound on Tuesday, driven by China’s cut in benchmark interest rates, were bombed-out sectors like mining and commodities that have been battered by worries over slowing Chinese demand. Glencore was up 4 percent and Antofagasta rose 6.8 percent.
Some investors warned that trying to buy beaten-up commodities stocks was like catching a falling knife, though.
“We remain bearish in oil and metals … These sectors, although now looking very cheap, may get cheaper still,” said Lorne Baring, Managing Director of B Capital.
Despite the risks involved in picking up bargains, some fund managers pointed out that economic signals coming from developed economies suggested demand was broadly healthy – even if the global growth outlook looked bruised.
“There are solid reasons to be worried about the global growth outlook given emerging markets and systemic fears in China,” said Valentijn van Nieuwenhuijzen, head of multi-asset strategy at NN Investment Partners.
“However, it is a risk – not yet a reality – that this will spread to the developed world.”
For now, the opportunities should be taken with a pinch of salt.
“Some of these sectors are oversold and extremely unloved … But we just have to be careful of the knock-on effects,” said Man GLG’s Powe.
($1 = 0.6338 pounds) ($1 = 0.8724 euros)