NEW YORK: Two of the best days for stocks this year began to undo two of the worst, putting major U.S. indexes back into the black for 2016.
The rebound comes as investors shake off their initial panic over the U.K.’s decision last week to leave the European Union and try to sort out the consequences of the vote.
But still strong demand for the safety of government bonds and currencies like the yen shows that markets are far from sounding the all-clear.
“The volatility out of Europe makes us worried, but so far the real economic impact is difficult to gauge,” said Mike Baele, senior portfolio manager at U.S. Bank Wealth Management, which oversees $133 billion in assets.
The Dow Jones Industrial Average advanced 284.96 points, or 1.6%, Wednesday to 17694.68, and the S&P 500 index rose 34.68 points, or 1.7%, to 2070.77.
The Dow has rallied 3.2% over the past two sessions, its biggest such gain since February, while the Stoxx Europe 600 also notched its biggest two-day gain since February. Neither index has recovered all the ground lost in the first two days after Thursday’s U.K. vote.
The Dow is still down 1.8% since Thursday, while the Stoxx Europe 600 is down 5.7%. In Japan, the Nikkei Stock Average’s post-Brexit losses stand at 4.1%.
London’s FTSE 100 index, whose multinational firms benefit from a weaker pound, has recovered all of its declines.
The rapid rebound prompted some traders and analysts to question whether the rally was sustainable given that fundamental questions remain about the health of the global economy and the direction of central-bank policy.
“People are returning to the same sort of complacency that we saw leading up to Friday of last week,” said Jason Thomas, chief investment officer of Savos Investments, a division of financial-services firm AssetMark, Inc.
Some traders were concerned that there hasn’t been a bigger selloff in safe government bonds—something they would expect to see if investors truly had grown more comfortable with taking bigger risks.
In fact, the yield on the 10-year U.S. Treasury note is still hovering near multiyear lows. It closed Wednesday at 1.477%, its third-lowest level of the year. Government bond yields remain depressed around the world.
Fitch Ratings said concerns around Brexit pushed the pile of sovereign bonds trading at negative yields up by $1.3 trillion since the end of May to a total of $11.7 trillion now.
When yields are negative, it means demand is so high that investors are paying more for the bonds than they would recover when they come due.
Gold, another haven, hit a high for the year at $1323.90 an ounce. The Japanese yen, at 102.820 to the dollar recently, has hardly weakened this week.
The British pound, the focus of heavy selling pressure in the wake of the Brexit decision, rose 0.6% against the dollar Wednesday to $1.3429. But it had commanded more than $1.48 before the vote.
The uncertainty isn’t all coming from the U.K. The second-quarter U.S. earnings season gets under way over the next two weeks. Corporate profits have fallen for four consecutive quarters and are expected to show another decline, according to FactSet.
The next monthly U.S. jobs report is scheduled for release July 8. It will be closely watched after the last report showed the U.S. added a surprisingly low 38,000 jobs in May.
Persistently low bond yields partly reflect investors’ expectations that central banks will need to maintain their easy-money policies to boost growth. Some are predicting rate cuts from the Bank of England and further stimulus from the European Central Bank.
Japanese Prime Minister Shinzo Abe told his finance minister and the central bank chief Wednesday to take any “necessary measures” to support the economy and financial markets, signaling vigilance over the yen’s resurgence following the U.K. vote.
Markets also expect the Brexit vote to derail the U.S. Federal Reserve’s plans to raise interest rates this year. Prices in the futures market show investors don’t expect another rate increase through next year. That is bad news for the battered financial sector. The KBW Nasdaq Bank index of large U.S. commercial lenders gained 2.5% on Wednesday. But at 63.69, it remains nearly 5 points below its close before the vote.
“We’re still playing a guessing game in the U.S. with the Fed, which has been detrimental to confidence in the markets,” Mr. Thomas said. “It’s a challenging time to be an investor.”
