Stock markets don't go straight up or straight down forever and trading reversals are common. Two days of heavy losses has sparked a round of short covering and bargain hunting in Europe sending the FTSE up 2.5% and the Dax up 2.1%.
US index futures which didn't fall as far are rebounding at a smaller pace, gaining about 1.1%. Crude oil is also bouncing back with WTI and Brent gaining 2.4%. Gold has dropped back 1.0% but remains well above $1,300. Other currencies have stabilized with GBP/USD holding near $1.3300, EUR/USD near $1.1000, USD/JPY near 102.00 and USD/CAD near $1.3000.
The rebound appears to have been sparked by the lack of a reaction to yesterday's decision by S&P and Fitch to cut their UK credit ratings by a notch. Markets failed to fall on that news indicating the implications of the Brexit vote had been priced into the market. Oversold technical conditions also appear to have played a role.
It's still early days and this action looks to be normal upward correction between developments. There is still a lot of uncertainty over what may happen next which could make for choppy waters favouring shorter term swings through the rest of the year.
A two day EU summit kicks off today in Brussels with UK PM Cameron joining today's proceedings only. The rebound suggests that traders are expecting cooler heads to prevail and for Brexit to be an orderly measured process over time, not a headlong rush out the door. This could change depending on how the meeting goes.
Back in London finance minister Osborne indicated he will not run to replace outgoing PM Cameron which may help to clear the way for new leadership. He also indicated the UK economy is strong enough to withstand Brexit related volatility. Cameron is expected to leave the big decisions for the new leaders.
Traders are also looking to central banks to make good on their promises to stabilize economies and markets from Brexit related volatility and to keep things from spiraling out of control. Talk out of Italy of a €40B support package for its banks was well received.
Today brings the second update of US Q1 GDP but this is unlikely to have an impact unless there is a huge surprise as data has been overtaken by recent events. Canada PM Trudeau joins his US and Mexican counterparts at the Three Amigos summit. These meetings usually don’t impact trading very much unless there’s a big surprise with NAFTA currently in force and relations among members fairly stable for now. Tonight retail sales kicks off a big week for Japan data.