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U.S. equity futures extended gains in early Wednesday trading, after Wall Street snapped its three-day losing streak last night, as investors continue to claw back declines triggered by historic volatility in markets around the world.
Stocks ended firmly higher Tuesday, although some gains were pared into the close of trading, as megacap tech stocks recovered and Treasury bond yields normalized following two days of upheaval tied to the unwinding of so-called carry trades funded in Japanese yen.
While not fully confirmed as the source of the market volatility, analysts now see that trade, where investors had first borrowed money at zero rate in Japan, converted it to dollars and invested in global markets, as the prime suspect.
“Stock market corrections are usually triggered by multiple forces, and in addition to worries about U.S. hiring, many hedge funds have been playing the carry trade, and borrowing money to buy the Japanese yen,” said Carol Schleif, chief investment officer at BMO Family Office.
“With the yen’s rise in recent days, that trade is unwinding and causing investors to sell stocks to raise money for margin calls,” she added..
Comments from the Bank of Japan Wednesday, during which Deputy Governor Shinichi Uchida said official need to be mindful of “developments in financial and capital markets at home and abroad being extremely volatile” further soothed concerns that another unwinding would trigger a fresh round of global volatility.
“I think concerns about slowing growth in the US led to global market moves,” the Deputy Governor said. “Within that, because the BoJ’s rate hike helped correct the weak yen, and as that correction progressed, it’s probably a reason Japanese stock prices fell more than in other countries.”
Markets will focus on a key 10-year bond auction later today where the Treasury will sell benchmark notes below the 4% threshold for the first time in more than a year.
The CBOE Group’s VIX index was marked nearly 40% lower in after-hours trading at $23.20, having spiked to as high as $60 in the worst of the selloff earlier this week.
Benchmark 10-year Treasury note yields, meanwhile, were edging higher as investors left safe-haven assets for riskier markets, with the paper marked at 3.935% heading into a $42 billion auction of new notes later in the session.
Benchmark 2-year note yields rose past 4%, and were last seen trading at 4.028%, while the U.S. dollar index gained 0.3% to trade at 103.278 against a basket of its global peers.
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On Wall Street, stocks are looking to extend last night’s gains in the wake of the volatility pullback, with futures tied to the S&P 500 indicating a solid 60 point gain at the start of trading, a move that would still leave the benchmark some 1% south of its Friday closing levels.
Futures tied to the Dow Jones Industrial Average, meanwhile, are priced for a 335 point opening bell gain with the tech-focused Nasdaq called 230 points higher.
Stocks on the move include Super Micro Computer (SMCI) , which tumbled 14% in premarket trading after the chipmaker issued a muted near-term earnings forecast and weakening profit margins.
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In overseas markets, Europe’s Stoxx 600 was marked 1.32% higher in Frankfurt, with Britain’s FTSE 100 rising 1.01% in London as markets around the world continued to recover from the early-week turmoil.
Overnight in Asia, Japan’s Nikkei 225 ended 1.19% higher as the yen weakened around 2% to 147.18 against the U.S. dollar, providing solid support for export stocks, while the regional MSCI ex-Japan benchmark rose 1.9% into the close of trading.
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