US close: Wall Street rides out volatile flip-flops to recoup losses

After two days of Wall Street blood-letting sparked a global stock market selloff, US investors eventually held their nerve after an initial lurch lower on Tuesday to end the session in the green.

At the opening bell Dow Jones plunged around a 500 point to test the 24,000 level that it had toyed with at the start of the week, amid a spike in volatility and widespread concern regarding the likely pace of interest rate hikes by the Federal Reserve.

Wall Street's self-proclaimed 'fear gauge', the Chicago Board of Options Exchange's VIX index, rose above 40 in the morning but by the close has given up 20% to 29.98. With many analysts suggested that automatic trading and sharp losses in products dependant on low volatility might have been the chief reason behind the selling seen on Monday, investors battled to recover their composure and their losses.

But by the closing bell, the 30-company index had gained 567.02 points or 2.33% to finish at 24,912.77, while the S&P 500 added 46.2 points or 1.74% to close at 2,695.14 and the Nasdaq composite climbed 148.36 points or 2.13% to 7,115.88 by the close. After Monday's 1175 point drop, the Dow's net position after two days was 608 points lower.

Despite violent moves in the last couple days in the market, fundamentals in the economy are very strong and it’s not just the US, it’s throughout the global economy,” said BNY Mellon strategist Alicia Levine.

Commenting on the outsized moves in stocks and volatility, analysts at Morgan Stanley said: "While large one-day S&P drawdowns have historically been associated with higher-than-usual returns for equities and tighter spreads for credit in the subsequent 12 months, weakness tends to persist 3-6 months out.

"Two key takeaways are that 1) risk assets can remain soft in the short term, and 2) realised volatility in months subsequent to sell-off episodes trends higher than usual, even as implied volatility drops off after initial spikes."

With the rout only lasting two days, many analysts saw the rout as a technical correction. US stocks had enjoyed record highs recently as investors welcomed President Donald Trump’s tax overhaul, but a strong non-farm payrolls report last Friday, which showed the best US wage growth in eight-and-a-half years, led some traders to conclude that the Fed might need to hike rates more quickly than previously anticipated.

After global equities enjoyed nearly two years of almost unfettered gains, "valuations have become stretched and technical," said Emmanuel Cau at JP Morgan, leading positioning and sentiment indicators to "flash red" in recent weeks.

"The unwinding of this extreme bullishness could have a bit more to go in the near term, but our view is that the medium term fundamental backdrop remains supportive and that one should indeed use the recent dip as buying opportunity."

Gaurav Saroliya at Oxford Economics was in agreement that a correction in global equities was overdue, with the pretext and triggers less important. "But worries about a 1994-style rise in interest rates derailing global risk appetite look overblown to us. Both the macro and policy environments are vastly different. Given strong earnings cycles and no evident liquidity stresses, we look to buy more into the correction. Japan, EM Asia and the even US are on our radar," he said.

Treasury prices slipped back again following Monday's rally, pushing the yield on the 10-year note up by 10 basis points to 2.80%. Earlier in the day, the consensus 2018 year-end forecast for the 10-year yield was 2.9%.

On the corporate front, Allergan dipped after it announced positive late-stage results for one of its migraine drugs and released its fourth-quarter earnings.

Elsewhere, Dunkin Brands was also a tad lower even as its fourth-quarter profit and revenue beat analysts' expectations, while Gartner was in focus as its fourth-quarter net profit beat views but sales fell a little short.

General Motors shares on the other hand were powering higher after reporting that cost-cutting and higher vehicle prices helped to offset a double-digit decline in sales volume during its fourth and final trading quarter