Stocks posted a modest bounce on Thursday after selling off in the previous session on a valuation warning from Federal Reserve Chairman Janet Yellen. A rebound in Treasury bonds — which have been under severe pressure lately, pushing up yields — helped sentiment as well.
Overall, it was a relatively quiet session, especially considering the turmoil in the futures market overnight, as traders await Friday’s payroll report. The jobs update — with 220,000 payrolls and a drop in the unemployment rate to 5.4% — will be key for determining whether or not the Fed will move to hike rates in June or wait until September or possibly later.
In the end, the Dow Jones Industrial Average, the Nasdaq Composite and the Russell 2000 all gained 0.5%, while the S&P 500 gained 0.4%.
Tech stocks led the way higher, rising 0.7% as a group, thanks to 7.5% move in Alibaba Group Holding Ltd (NYSE:BABA) on good earnings, which lifted Yahoo! Inc. (NASDAQ:YHOO) 5.3% because of its soon-to-be-spun holding in the Chinese internet giant. Amazon.com, Inc. (NASDAQ:AMZN) gained 1.9% while Google Inc (NASDAQ:GOOG, NASDAQ:GOOGL) rose 1.2%. Yelp Inc (NYSE:YELP) gained 23% on reports it is exploring a sale.
Airlines were strong on a 3.5% drop in crude oil to close at $58.83 a barrel with American Airlines Group Inc (NASDAQ:AAL) up 4.3%. Energy was the laggard dropping 1.1% as a group as a rebound in the dollar weighed as well reports of weakness in the physical oil market.
The bounce back from overnight weakness was driven by a drop in the 10-year Treasury yield from a high above 2.3% to settle near 2.2% this afternoon. Similar volatility — driven by a steady increase in inflation expectations — has hit the European bond market as well.
The fixed-income market is front running the Fed — acting ahead of an actual liftoff on short-term rates — as inflation expectations start drifting higher. While recent economic data has been disappointing, including a very soft Q1 GDP performance and some of the recent data points on jobs ahead, bond traders are apparently looking through this to a rebound in the second half of the year.
The big rebound in energy prices could be playing a role, with crude oil testing above $62.50 a barrel this week for the first time since December — a 47% increase from the March low. Gasoline futures are up nearly 60% from their January low. And while job gains have slowed, the labor market remains tight with the unemployment rate at 5.5% and business surveys highlighting a dwindling pool of qualified applicants, precursors of wage inflation.
We’ll know more on this front tomorrow morning when the jobs numbers hit. Buckle up, because the reaction is sure to be volatile.
For now, I continue to recommend a neutral-to-defensive positioning via positions such as the VelocityShares 2x VIX (NASDAQ:TVIX) — a leveraged bet on Wall Street’s “fear gauge” — that’s up 3.5% for Edge subscribers since it was added earlier this week.
Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters.
