Markets shook off fears of a trade war Wednesday, and traders have shifted focus to whether the next jolt for stocks could come from a surprise jump in wages in Friday's jobs report.
China's announcement of tariffs in response to U.S. tariffs set off a gut-wrenching equities sell-off and fed market fears of a global trade war that would slow the economy and bite into corporate profits.
But that sell-off reversed, and the Dow rose more than 700 points from a 500-point loss during Wednesday trading. The Dow closed up 230 at 24,264. The S&P 500 rode the same roller coaster, closing up 1.2 percent at 2,644, above the key 200-day moving average at 2,591.
"At this point, the expectation, given the market move, is that further [trade] escalation is going to be less likely. Our view is a lot of it was priced in," said Keith Parker, UBS U.S. equity strategist.
Normally, the markets would be fixated on Friday's employment report, but this week with the volatile moves around trade and the sell-off in technology the jobs report has been on the back burner.
Friday's employment report is expected to show 190,000 jobs were created in March and average hourly wages grew by 0.2 percent, according to Thomson Reuters. A bigger jump in wages could spook markets, as it did in February, and stir speculation that rising wage inflation could bring on more Fed interest rate hikes.
Thursday's data include weekly jobless claims and international trade, both at 8:30 a.m. ET.
Jonathan Golub, chief U.S. equity strategist at Credit Suisse, issued a note Wednesday morning during the steep slide in stocks, pointing out that equities could be "crying wolf," with the bond market holding up better.
"The stress being felt in equities is not showing up in either credit conditions or volatility in other asset classes. This an extremely positive sign," wrote Golub.
After the market close, Golub told CNBC it appears the market is on sound footing fundamentally.
"We are trying to attach a narrative to the market that is probably contrived. If you look back at February, the thing which was setting the market volatility off was rising rates and spiking inflation. The funny thing is inflation expectations came down, interest rates came down, and the market found another excuse, and it was tech worries and trade wars," he said. "I think those fears will fade. We have to ask if there's anything really threatening the longer-term fundamentals here."
As stocks sold off, the move in bonds was much more muted. The 10-year Treasury yield initially moved lower but was higher at the end of the day, at 2.80 percent, reflecting just a slight and temporary flight to safety. The 2-year yield rose to 2.29 percent.
"The topic of conversation was a stunned realization that the [bond] market wasn't doing anything," said Tom Simons, money market economist at Jefferies. "I think that maybe guys in the bond market are a little more keyed in to the dynamics of the economy and realize this is not the end of the world if there is some tit-for-tat retaliation that continues. ... Stocks maybe had a little more of an emotional reaction."
"There was some commentary today that there's a decent enough chance these tariffs don't even make it," Simons said.
Next up on the trade front is whether the tariffs are instituted or whether there are negotiations to avoid them.
"Assuming no further escalation, the narrative remains solid growth, and we get another reading with payrolls and average hourly earnings," Parker said. "Our view is that payrolls should maintain that 'growth is solid' narrative."
Parker said one indicator he follows shows the possibility of a very good outcome for stocks over coming months. He follows the ratio of equity volatility to rates volatility, which is currently near historic highs.
"Rates volatility has come down. Equity volatility has not," he said. "The view is the VIX often gets ahead of known events and catalysts." With the ratio now above 0.35, that historically has led to an average gain for the S&P 500 of 6.5 percent over three months and 16 percent over six months.
The ratio was at similar levels during August 1998 and January 2016.
He said while the jump in interest rates sent stocks lower in February, rates expectations have reset and real rates have stopped going up.