The Dow and the broader US stock market rebounded Tuesday, driven by optimism that currency tensions between the United States and China would ease.
The Dow (INDU) finished up 312 points, or 1.2%, while the S&P 500 (SPX) closed 1.3% higher. The tech-heavy Nasdaq (COMP) Composite, which was hit worst in Monday’s selloff, closed up 1.4%.
For the S&P and the Nasdaq it is their first positive performance in seven days. The Dow is in the black for the first time in six days.
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Markets recovered from a terrible day on Monday, when Chinese government officials said they would take steps to keep its currency from falling too far.
China priced the yuan’s reference rate at 6.9683 to the dollar, a hair above the key 7:1 ratio to the US dollar. Although that was the weakest level for the yuan in 11 years, many Wall Street investors feared China would price the yuan below that psychological 7:1 barrier.
The yuan continued to slide Tuesday, but the pace of its decline slowed. One dollar last bought 7.0235 yuan in China, and 7.0530 yuan in the offshore market, where the currency trades more freely.
Stock investors also took comfort after the Chinese central bank announced plans to issue central bank bills worth 30 billion yuan next week. That propped up China’s currency, which bounced back slightly against the dollar after the announcement.
The CBOE Market Volatility Index (VIX), or VIX, was down more than more than 18%, compared with a more than 30% jump.
“Also supporting the markets is probably bargain hunting of companies with good fundamentals and short-covering elsewhere,” wrote Forex.com technical analyst Fawad Razaqzada in a note.
In global markets, Asian stocks finished lower, and European equities slipped into the close, giving up earlier gains.
The global market freakout began after China devalued its currency on Monday, leading it to fall below the 7:1 threshold that had last been breached during the financial crisis. Global stocks sold off in response and the Dow, S&P 500 and Nasdaq Composite logged their worst day of 2019. The Nasdaq was the worst hit, because tech stocks would be hit particularly hard by an escalation in the trade war.
Things got worse on Monday evening when the United States, for the first time in years, labeled China a currency manipulator.
But now markets are calming down.
Investors feared the label would eliminate China’s incentive to slash the value of the yuan versus the dollar, setting off a currency war with the United States. A further devaluation of the Chinese currency could ease the burden of America’s tariffs on China. Wall Street fears an intentionally weaker yuan could escalate the trade war, prompting the United States to raise its tariffs on China or intervene in the value of the US dollar.