Japanese stocks surged at the open on Tuesday, bolstering a recovery across battered Asian share markets and even triggering circuit breakers in some instances. This rebound came after central bank officials made reassuring statements to calm investor nerves.
The Nikkei index soared more than 8% to exceed 34,000 in the opening minutes of trading, sharply rebounding from its 31,458 close on Monday. The index had plummeted 12.4% in its worst selloff since the 1987 Black Monday crash.
Wall Street also appeared steadier, with S&P 500 futures rebounding 0.9% in early trade, while Nasdaq futures rose 1.2%. On Monday, the S&P 500 had lost 3.00%, and the Nasdaq Composite had declined by 3.43%.
“After the breathtaking and historic moves seen across Asian markets yesterday, driven predominantly by a significant liquidation of margin positions, we look for a solid counter-rally on open today,” said Chris Weston, head of research at broker Pepperstone. However, he cautioned that the implied volatility level for the Nikkei was at a stratospheric 70%, suggesting ongoing market turbulence.
“After such a furious shake-out of leveraged positioning, with Japanese banks absolutely taken to the cleaners, it will take the bravest of investors to buy with any conviction,” Weston added.
Currencies also seemed to be reversing some of Monday’s sharp moves, with the dollar edging up to 145.64 yen, having sunk 1.5% on Monday to as low as 141.675. The yen has surged in recent sessions as investors were squeezed out of carry trades, where they borrowed yen at low rates to buy higher-yielding assets. The dollar pared its losses on the safe-haven Swiss franc, holding at 0.8546 francs from a low of 0.8430.
Treasury yields had also come off their lows, partly in reaction to a rebound in the US ISM services index to 51.4 for July. Notably, the employment index jumped 5 points to 51.1, suggesting last week’s payrolls report may have overstated the weakness in the labor market.
“Gauging the bottom of such historic selloffs is complicated, and investors will most likely remain cautious before pouring capital back into equity markets,” said Boris Kovacevic, Austria-based global macro strategist at payments firm Convera. “However, the dollar-yen pair has now fallen 12% since peaking five weeks ago and is in highly oversold territory. The yen is therefore vulnerable to any upside surprises in US macro data, leading investors to reconsider the recession trade. This would help Japanese equities stabilize,” he added.
Yields on 10-year Treasury notes were back at 3.84%, having been as low as 3.667% at one stage.
Federal Reserve officials did their best to reassure markets, with Federal Reserve Bank of San Francisco President Mary Daly emphasizing the importance of preventing the labor market from tipping into a downturn. Daly added that she was open to cutting interest rates as necessary and that policy needed to be proactive. These comments supported market expectations that the Fed would cut rates by 50 basis points at its September meeting, with futures implying an 87% chance of such a move. The market has approximately 115 basis points of easing priced in for this year and a similar amount for 2025.
In precious metals, gold failed to attract a safe-haven bid amid talk that investors were taking profits to cover losses elsewhere. Spot gold stood at $2,409 an ounce after losing 1.52% overnight.
In energy markets, oil prices bounced early Tuesday as news that several US personnel were injured in an attack on a military base in Iraq stoked fears of a wider conflict. US West Texas Intermediate crude futures climbed $1.18, or 1.6%, to $74.12 per barrel.
