Stocks kicked off the week with big gains after suffering their worst September in two decades as Treasury yields halted a seemingly endless surge, with weak U.S. manufacturing data soothing concern the Federal Reserve will overtighten monetary policy.

As a sign of exhaustion that followed the recent washout, about 97 per cent of the S&P 500’s shares flashed green, with the gauge having its best day since July. Aside from being oversold from a technical perspective, extreme pessimism and low fund positioning also fueled a rebound that followed its third-worst performance during the first nine months of a year since 1931.

In a bad-news-is-good-news world as far as Fed policy goes, a drop in the Institute for Supply Management’s gauge of factory activity suggested the economy may be faltering, reducing the urgency for more aggressive rate hikes. Fed Bank of New York President John Williams said the central bank still has more work to do to curb inflation, warning the process will take time.

Equities also managed to gain even in the face of Credit Suisse Group AG’s market turmoil and Tesla Inc.’s disappointing deliveries that prompted an 8.6 per cent plunge in the electric-vehicle giant’s shares.

“The market is oversold, and sentiment is extremely negative, so a bounce…even a sharp one…could happen at any time,” wrote Matt Maley, chief market strategist at Miller Tabak + Co. “However, we see lower-lows before the ultimate bottom is reached for this bear market…as the stock market has not fully priced-in a recession.”

As equities snapped back, the Cboe Volatility Index dropped to around 30 after also closing above that threshold every day last week. Nicholas Colas at DataTrek Research said Friday he’d like to see the gauge finishing over that mark for several more days before believing on a “tradeable low.”

Key technicals will likely need to capitulate before the S&P 500 can truly bottom, according to Bank of America Corp.’s Stephen Suttmeier. Although the U.S. equity market typically turns bullish in the fourth quarter of midterm election years, capitulation remains elusive in equity put-call ratios and S&P 500 selling volume.

JPMorgan Chase & Co.’s Marko Kolanovic reiterated that increasingly hawkish central banks and the destruction of the Nord Stream pipelines will likely cause delays in the U.S. equity-market’s recovery, putting the firm’s year-end target for the S&P 500 -- which implies a potential upside of about 30 per cent from Monday’s close -- at risk.

Treasuries surged across the curve, with the five-year yield at one point plummeting over 30 basis points. The 10-year rate sank to 3.65 per cent after recently topping 4 per cent and climbing for nine straight weeks. Swaps tied to Fed policy meeting dates fell sharply for early 2023. The March meeting contract’s rate currently suggests a peak policy rate of 4.46 per cent next year, down from recent highs above 4.60 per cent.

The dollar slipped, yet the latest MLIV Pulse survey showed the greenback is expected to hit new highs over the next month. Gold surged. U.S. coal prices surged past US$200 for the first time as a global energy crunch drives up demand for the dirtiest fossil fuel. Oil saw its biggest rally since July as potential OPEC+ output cuts heighten fears of supply tightness on the horizon.

Despite the rebound in risk assets, markets are bracing for more turbulence as a crucial reading on the still-tight U.S. labor market is set to give traders a chance to reassess the Fed’s commitment to its aggressive path of rate hikes.

The Fed should consider stopping its tightening campaign after one more rate hike in November, according to Ed Yardeni, who coined terms like “Fed Model” and “bond vigilantes.” The stress in financial markets from big rate increases, a surging dollar and quantitative tightening has reached the point that officials should make financial stability the top priority, he added.

“Investors are starting to doubt central banks globally will remain aggressive with fighting inflation as financial stability risks are growing,” said Ed Moya, senior market analyst at Oanda. “It is too early to call for a Fed pivot, but it seems the action in Treasury markets suggests traders are growing confident that the global growth slowdown is starting to drag down pricing pressures.”

Elsewhere, Brazilian assets soared after President Jair Bolsonaro secured his way to a runoff election against Luiz Inacio Lula da Silva as investors cheered on the incumbent’s better-than-expected showing and bet his leftist challenger will be forced to moderate his stances in the second stretch of the race. 

The real was the best-performing among the world’s major currencies Monday, while the Ibovespa gauge of stocks climbed 5.5 per cent -- its biggest gain since April 2020.

After two consecutive months of declines, Bitcoin advocates are hoping that the largest cryptocurrency reverts to form in October, which has typically been one of its best months for gains. The virtual currency tends to rise roughly 25 per cent in October and has, since 2015, advanced more than 85 per cent of the time during it, according to Bespoke Investment Group.

Key events this week:

• Eurozone PPI, Tuesday
• U.S. factory orders, durable goods, Tuesday
• Fed’s John Williams, Lorie Logan, Loretta Mester, Mary Daly speak at events, Tuesday
• Eurozone services PMIs, Wednesday
• OPEC+ meeting begins, Wednesday
• Fed’s Raphael Bostic speaks, Wednesday
• Eurozone retail sales, Thursday
• U.S. initial jobless claims, Thursday
• Fed’s Charles Evans, Lisa Cook, Loretta Mester speak at events, Thursday
• U.S. unemployment, wholesale inventories, nonfarm payrolls, Friday
• BOE Deputy Governor Dave Ramsden speaks at event, Friday
• Fed’s John Williams speaks at event, Friday

Some of the main moves in markets:

Stocks

• The S&P 500 rose 2.6 per cent as of 4 p.m. New York time
• The Nasdaq 100 rose 2.4 per cent
• The Dow Jones Industrial Average rose 2.7 per cent
• The MSCI World index rose 2 per cent

Currencies

• The Bloomberg Dollar Spot Index fell 0.5 per cent
• The euro rose 0.3 per cent to US$0.9828
• The British pound rose 1.4 per cent to US$1.1325
• The Japanese yen was little changed at 144.67 per dollar

Cryptocurrencies

• Bitcoin rose 1.7 per cent to US$19,556.6
• Ether rose 1.2 per cent to US$1,319.21

Bonds

• The yield on 10-year Treasuries declined 17 basis points to 3.65 per cent
• Germany’s 10-year yield declined 19 basis points to 1.92 per cent
• Britain’s 10-year yield declined 13 basis points to 3.96 per cent

Commodities

• West Texas Intermediate crude rose 4.7 per cent to US$83.26 a barrel
• Gold futures rose 2.2 per cent to US$1,709.20 an ounce