US stocks rebound in early trading

Markets have recovered some losses this afternoon, but the FTSE 100 remains deep in the red on a tough day for risk appetite.

• Wall Street claws back losses after the open.
• Global equity rally dented, but not terminally.
• Dollar solid in wake of Fed minutes.

US indices have begun the day with a rebound off their initial lows, which has in turn dragged European indices somewhat out of the red, although the post-Fed minutes caution does endure. Continental European indices such as the Dax and the CAC, which had been riding high going into this week, have seen a sharp correction from their highs as growth worries take hold again. How much of this is down to some pre-options expiry volatility, exacerbated by the lower volumes seen in the summer, is up for debate, but for now the pendulum has shifted in favour of the sellers after a grind higher from mid-July. It hardly dents the gains made so far this year however for US and European markets, and selloffs have been relatively brief all year, so a broader perspective would argue that investors are still content to be long risk, just not at the highs seen this week. In addition the continued deterioration in Asian markets is a real reason for concern, especially given how it has been ignored by markets on this side of the planet. 

The dollar continues to be the big winner from last night’s minutes, with markets continuing to expect a more benign environment for the greenback as the Fed slowly begins its move towards tapering. Those expecting a rising dollar to unhinge the equity rally will likely be disappointed, since a reviving global economy will, by its very nature, continue to make equities attractive. But such regime shifts are never easy, and it makes sense to expect the bumps in the road to continue. This week’s low in the Vix was a warning to those prepared to listen, and is likely to be repeated at least a couple of times before the year is out.