U.S. stocks rallied to a seven-week high after manufacturing in the world’s largest economy showed signs of stabilizing, while optimism that central banks from Asia to Europe will add to stimulus boosted emerging-market currencies and commodities.

The Dow Jones Industrial Average surged more than 300 points, while the Standard & Poor’s 500 Index rebounded from a third consecutive monthly decline. The yield on the 10-year Treasury note jumped eight basis points to 1.82 percent, while gold fell from its biggest monthly rally since 2012. China’s yuan strengthened for the first time in eight days. Crude topped $34 a barrel in New York.

While February marked a fourth consecutive monthly slide for global stocks, signs that financial tension in China and a slump in commodities are abating has seen shares recover more than 5 percent since Feb. 11. Data suggesting that American consumers can still power the world’s largest economy and hints from central banks in Asia and Europe that more stimulus is at the ready underpinned the revival.

Equities got a boost after data showed American factory activity in February shrank less than forecast as gains in new orders and production provided signs that the beleaguered industry could soon stabilize. Factories should also find a source of strength in domestic demand, which is being boosted by consumers with solid job gains and a nascent pickup in wage growth. A rebound in oil prices in the final two weeks of February also helped stabilize equity markets.

“The numbers today were pretty decent with manufacturing up from estimates and the construction numbers were pretty good as well so if inflation keeps moving over the next few months that could be a good thing as we started the year talking about negative rates and deflation,” Mark Kepner, an equity trader at Chatham, New Jersey-based Themis Trading LLC, said by phone. “Financials are also bouncing back after getting beat and as we get some stability in oil prices, things are looking a little better.”

David Fuller's view

We know that market panics are difficult to sustain without continued bad news.  Moreover, we also know that short positions have been high recently.  Nevertheless, today’s stock market rallies against the background of short-term overbought conditions (see Stochastic indicators in the Chart Library) for many indices is encouraging. Further upside follow through, which appears likely, would reaffirm our ‘best case’ forecast for no worse than a cyclical bear market followed by lengthy ranging on Wall Street, before the overall upward trend resumes.  

Of course most other stock markets have been considerably weaker, with severe bear market trends among primarily commodity exporting countries such as Brazil. It would certainly be interesting if it can now break decisively above resistance near 45000. However, some of these resources markets are leading the rally from last month’s lows.  Further recoveries by depressed industrial commodities, not least crude oil, would improve investor sentiment by assuaging concerns over negative deflation and recession.       

(See also: Manufacturing in U.S. Steadies in February as New Orders Expand)