Japanese stocks rebounded on Tuesday after yesterday’s dramatic rout, easing fears that global equity markets are on the cusp of a major meltdown.
Having dropped over 12 per cent on Monday, suffering its worst day since 1987, the Topix rebounded over eight per cent on Tuesday. The Nikkei meanwhile jumped 9.1 per cent after falling lost more than 12 per cent yesterday too.
Japanese stocks led a broader Asian rally, with South Korea’s Kopsi rising nearly four per cent and the Taiwanese stock market also recovering after the worst day in its history.
“it’s a turbocharged turnaround Tuesday in Asia,” Deutsche Bank’s Jim Reid said.
Looking ahead to European markets, futures for the FTSE 100 are up around 1.2 per cent while markets in Paris and Frankfurt are also expected to open higher.
Equity markets all over the world had a torrid day yesterday reflecting fears that the US Federal Reserve might have waited too long to start cutting interest rates, putting the world’s largest economy at risk of recession.
The S&P 500 lost 4.25 per cent when it opened while the Nasdaq dropped 6.4 per cent, although both then stabilised slightly on the back of strong survey data and reassuring comments from Fed officials.
Tech stocks have been particularly hard hit due to weaker than expected results from many big tech giants last week. Some analysts have warned that the sell-off might reflect the long-awaited puncturing of the AI bubble.
One other factor driving volatility is uncertainty around the future of the yen carry trade. This is where investors would borrow cheaply in yen to invest in higher yielding assets elsewhere in the world.
With the Bank of Japan hiking interest rates last week, the carry trade is no longer as profitable as it was, forcing investors to dump their riskier bets.
BMI, a unit of Fitch Ratings, said that the Bank of Japan’s decision led to “a sharp unwind of the yen carry trade, which added downside pressure on risk assets which were already selling off.”
Despite the rebound, Matt Simpson, a senior market analyst at City Index, warned that it was too soon to sound the all-clear.
“The Nikkei’s enjoying a decent retracement against Monday’s plunge, as comments from the Fed’s Daly and a stronger-than-expected ISM services report soothed fears of a panic Fed cut next week,” he said.
“But this is not exactly a risk-on rally. And we are not yet sure if this is just a breather between water-boardings or there is more pain to follow.”