(Bloomberg) — The plunge in U.S. stocks following a weak $42 billion sale of Treasury bonds underscored the fragility of the market recovery amid historic volatility.

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The S&P 500 has pared gains after rising nearly 2%, fueled by dovish signals from the Bank of Japan. Investors avoided the auction of 10-year U.S. Treasury notes – despite a pre-sale sell-off – as weaker-than-expected demand was a sign that the recent rally in bonds may have run its course.

“Terrible 10-year auction,” said Peter Boockvar of The Boock Report. “You would have thought that today’s 10-year auction would go well given this backdrop, but no, the auction was terrible.”

Bonds also came under pressure as 17 highly rated issuers sold their debt on the busiest day since February. Meta Platforms Inc. led the flood of transactions with a $10.5 billion offering.

Nationwide’s Mark Hackett says recent events have been a “master class” in how emotions can dominate movement in markets, particularly when sentiment and positioning are almost entirely positive.

The S&P 500 oscillated around 5,240 points. Micron Technology Inc. resumes a share buyback program. Super Micro Computer Inc. tumbled on disappointing results. Airbnb Inc. sank on weak prospects.

Yields on 10-year U.S. Treasuries rose six basis points to 3.95 percent. The Japanese yen fell two percent. The Mexican peso led a rally in emerging markets, easing pressure on currencies that had come under pressure as investors abandoned yen-funded bets on riskier assets.

The calming of Japan came on the heels of last week’s massive swings in Japanese stock prices, which plunged into bear markets before rebounding sharply. The swings were exacerbated by the prospect that the Federal Reserve would cut interest rates even more aggressively, prompting traders to quickly unwind once-popular yen-funded carry trades, including crowded positions in U.S. technology stocks.

“Investors are taking a more sober view of the events of the last week,” said Fawad Razaqzada of City Index and Forex.com. “That doesn’t mean we’re completely out of the woods yet. But there is at least some stabilization that should allow some markets to realign with fundamentals.”

“The Bank of Japan was the first to try to calm markets,” said Krishna Guha of Evercore. “This required extreme volatility in Japanese asset prices and the unwinding of global yen carry trades, which accelerated the AI ​​reversal and equity sell-off amid renewed fears of a U.S. recession.”

The story goes on

The global carry trade unwinding triggered last week by the BoJ’s surprisingly more hawkish stance – which in turn significantly strengthened the yen – has eased considerably, according to Quincy Krosby of LPL Financial.

“Markets globally have breathed a sigh of relief as the pace of unwinding eases, but the yen’s relationship to the dollar is also an important part of the carry trade calculation,” she noted. “A weaker dollar, driven by market perceptions that the Fed will soon begin an easing cycle, should support a stronger yen – which negatively impacts trading.”

Markets have been reeling from recent weak U.S. data, but it’s too early to call for an economic slowdown, according to the Franklin Templeton Institute. After Treasuries rose, “it makes sense” to take some profits, wrote Stephen Dover.

Yields on US government bonds are probably too low because there is “no broad-based evidence that either the labor market or market functioning is deteriorating acutely,” say strategists at Goldman Sachs Group Inc.

“The argument for a meaningful rally from here is that one (or both) of these risks materialize,” wrote William Marshall and Bill Zu. “With more favorable outcomes, we believe the center of gravity of yields is likely to be above current levels across the curve, relatively parallel to forwards.”

Will Compernolle of FHN Financial believes that US Treasury yields are now well above their lows on Monday, providing a sense of calm after the financial markets were thrown into disarray earlier this week.

“However, it is too early to declare the chaos over and US Treasury yields could fall again in the wake of weak trading in August and a relative data vacuum for the rest of this week,” he said.

Company highlights:

• Walt Disney Co. delivered a mixed picture when it announced its third-quarter results on Wednesday: The weakness of its famous theme parks offset its first gain in the streaming sector.

• Shopify Inc. reported second-quarter revenue and profit that beat analysts’ estimates, showing the Canadian e-commerce company is managing to cope with reluctance in consumer spending.

• CVS Health Corp. cut its 2024 earnings forecast for the third consecutive quarter and announced cost-cutting measures to save $2 billion over several years as health care spending continues to soar.

• Ride-sharing company Lyft Inc. released its second-quarter bookings and issued an outlook that fell short of Wall Street expectations.

• Boeing Co. is currently reworking the fuselage component that flew out of a nearly new 737 Max 9 aircraft in mid-flight in January. The aircraft manufacturer wants to learn lessons from the accident that plunged it into crisis.

• Novo Nordisk A/S reported disappointing sales for its hit weight-loss drug Wegovy, a rare setback for the Danish drugmaker as it braces for more competition in the booming market.

• Rivian Automotive Inc. is keeping its full-year vehicle production target unchanged from last year, but its CEO expects production to increase in 2025 despite the looming threat of a plant closure.

• Brookfield Asset Management Ltd. said assets under management rose to a record of about $1 trillion and reported higher profit than a year earlier, but still below analysts’ expectations.

Important events this week:

• Industrial production Germany, Thursday

• US initial jobless claims, Thursday

• Speech by Fed Chairman Thomas Barkin on Thursday

• China PPI, CPI, Friday

Some of the key market movements:

Shares

• The S&P 500 fell 0.5% at 2:14 p.m. New York time

• The Nasdaq 100 fell 0.8%

• The Dow Jones Industrial Average fell 0.5 percent

• The MSCI World Index remained little changed

Currencies

• The Bloomberg Dollar Spot Index rose 0.1%

• The euro was little changed at USD 1.0921.

• The British pound remained almost unchanged at USD 1.2692.

• The Japanese yen fell 1.7% to 146.80 per dollar

Cryptocurrencies

• Bitcoin fell 2.3% to $55,249.3

• Ether fell 4.9% to $2,367.35

Tie up

• The yield on 10-year government bonds rose four basis points to 3.94%.

• The yield on German 10-year bonds rose by seven basis points to 2.27 percent

• The yield on British 10-year bonds rose three basis points to 3.95 percent

raw materials

This story was created with the assistance of Bloomberg Automation.

– With support from Robert Brand, Sujata Rao and Winnie Hsu.

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