- US stocks opened firmly higher on Monday, extending Friday’s gains after a volatile week.
- The three major indexes slumped into a correction — a 10% drop from recent highs — last week.
- The decline was preceded by a rapid rise to new highs. It coincided with new concerns about inflation, and was worsened by the wrecking of trades that had bet on low volatility.
US stocks are extending gains from late-Friday, putting the market on track for a strong start to the new week.
The three major indexes plummeted into correction last week — a 10% drop from recent peaks — after a long and unusually stable period that helped catapult them to record highs. The 5.2% weekly decline for the S&P 500 was the worst in two years.
“You almost could hear a collective sigh of relief on Friday when the market closed higher on the day — and ahead of a weekend at that,” said John Stoltzfus, the chief investment strategist at Oppenheimer Asset Management, in a note on Monday.
“While we believe that the majority of the sell-off may be over for now, there is likely to be a continuation of recurring volatility as speculative positions are unwound by some investors and as still others ponder some of the worry-items that helped cause the market stumble.”
Last week’s correction was worsened by a scramble out of exchange-traded notes that were designed to profit from calmer market activity. After the Cboe volatility index (VIX) had a record intraday rise on Monday, the VelocityShares Daily Inverse VIX Short-Term ETN (XIV) and the ProShares Short VIX Short-Term Futures ETF erased an estimated $3 billion within minutes.
The sell-off coincided with a renewed concern among investors about how the Federal Reserve would use higher interest rates to deal with inflation; the January jobs report released February 2 showed the fastest year-over-year wage growth since 2008.
The release on Wednesday of the Consumer Price Index for January will provide some more clarity on inflation.
Treasurys sold off on Monday, with the yield on the 10-year note rising 5 basis points to 2.88%. It earlier touched a new four-year high above 2.9%.
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