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UPDATE: US stocks recover after global sell-off

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UPDATE: US stocks recover after global sell-off

U.S. equities took investors on a wild ride Feb. 6, bouncing back from early morning losses to move into positive territory, even after inflation fears kept stock markets depressed globally.

After opening down, the S&P 500 closed 1.74% higher at 2695.14, though the index is still down more than 4% over the past three trading days.

The Chicago Board Options Exchange Volatility Index, or VIX, which reflects investors' expectations of how volatile markets will be over the next month, fell back to 29, after jumping up to 46 earlier in the day.

Investors who had piled into government bonds as safe havens began venturing back into the stock markets. The yield on 10-year U.S. Treasuries regained 20 basis points it had lost to bring them close to the high of 2.84% on Feb. 2.

A majority of strategists have voiced confidence that the downturn is simply a long overdue correction to frothy markets, which has helped shore up equity values for now.

Earlier, investors scrambled to work out how big a correction is in store for risk assets, as European stocks followed Asian indexes lower to drag the global stock rout into a fourth consecutive trading session even as easing bond yields relieved some of the fears that triggered the sell-off.

Europe's Stoxx 600 closed down 2.41% and the U.K.'s FTSE 100 was down 2.64% by market close on Feb. 6, after a three day sell-off that began the end of last week.

The S&P 500 slid 4.1% Feb. 2, its biggest drop since August 2011, while the Dow Jones shed 4.6% in its biggest fall ever on a pure points basis, prompting a similar dive on Asian markets overnight. Markets took fright when bigger-than-expected rises in U.S. wages and payrolls boosted expectations for Fed rate hikes, sending bond yields higher at a time when many companies are highly leveraged.

"Playtime is officially over now and the rising volatility has painfully remind some investors that one-way bets don't exist," said Rabobank analysts in a note to clients shortly before the London open.

"Global equities extended the biggest selloff in more than a year and virtually all year-to-date readings have now turned from green to red. What has been complacently built up in December and January, fell apart in just a couple of trading days."

Japan's Nikkei 225 Index closed 4.73% lower. Hong Kong's Hang Seng Index lost 5.02% and the Shanghai Composite Index was down 3.35%; its largest one-day fall since February 2016.

"These declines have been a long time coming and in a sense have already started to become self-accelerating," said Michael Hewson, chief market analyst at CMC Markets U.K., in a note to clients.

Fueling the rise

Hewson said: "At the end of last year margin debt levels on U.S. stocks were at record highs, helping fuel the rise we've seen in the last few months. The sell-off in the last few days is likely to reverse this trend, and potentially accelerate it further, particularly if investors start to unwind it over concerns that we could fall further, which seems likely if events in Asia this morning are any guide."

Credit markets provided some relief, with core European corporate bond spreads only a handful of basis points wider, though a raft of new bond issues have been postponed, according to one head of syndicate at a London-based investment bank. That includes Greece's plan to tap the market for a seven-year bond, the Financial Times reported.

"The sentiment isn't good but the ECB [asset purchase program] is still there, so there is a limit to any sell-off before people come in for the extra yield," he said.

"What's interesting is U.S. yields, which supposedly caused this sell-off in the first place, have begun to tighten back, so this idea that everyone is being spooked by higher yields doesn't carry the weight it once did."

Investors will now be looking for any ripples of concern from global central bankers. Federal Reserve Bank of St. Louis President James Bullard moved to assuage some fears, saying the strong jobs report from last week may not necessarily mean that inflation will suddenly rise faster than expected. Four more Fed officials were due to speak Feb. 7.

Expectations for a March hike from the Fed have edged lower from around a 90% probability to an 80% probability, while pricing for the end of the year has moved from just over three hikes from the Fed to just under three hikes, according to ING's chief international economist James Knightley.

Knightley expects them to tread cautiously given market sensitivities and merely repeat the mantra that the central bank will continue with "further gradual increases" in interest rates.

"One of the reasons Fed officials have cited for raising interest rates is financial stability risks, while also noting concern about 'somewhat rich' asset valuations," he said in a note to clients.

"A key quote from Janet Yellen has been that 'persistently easy monetary policy might also lead to increased leverage and other developments, with adverse implications for financial stability.'

"This is arguably a reason why equities have done so well of late; investors borrowing cheaply to put money into risk assets. Yesterday's moves may help to bring about a better sense of perspective and risk evaluation — hence the idea of a 'healthy correction.'"