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Japanese stocks surged on Tuesday, leading markets higher across Asia in a striking reversal of the previous day’s global sell-off, as European stocks also recouped some of their losses.
Amid warnings from traders to expect extraordinary volatility, Japan’s broad Topix index closed 9.3 per cent higher and the yen stabilised at about ¥145.70 to the dollar after strengthening sharply in recent weeks. The tech-heavy Nikkei 225 rose 10.2 per cent.
European stocks also clawed back some of their losses in early trading, although steered clear of a dramatic rebound. The region-wide Stoxx 600 index gained 0.6 per cent. France’s Cac 40 held steady, while Germany’s Dax increased 0.6 per cent and the UK’s FTSE 100 was up 0.3 per cent.
US futures also pointed to a rebound when markets open in New York. Contracts tracking the S&P 500 were trading 1.1 per cent higher while the Nasdaq 100 was expected to open up 1.5 per cent.
Global markets have tumbled in recent days amid fears the Federal Reserve has been too slow to respond to signs the US economy is cooling, and that it could be forced to play catch-up with a series of rapid interest rate cuts. The Japanese stock market has been hardest hit, plunging more than 12 per cent on Monday, days after a surprise Bank of Japan rate rise.
Tuesday’s rebound was equally eye-catching. At one stage, the Nikkei 225 Average was up 3,453 points — its biggest intraday surge. The rush back into Japan’s equity market was so intense that trading in Nikkei and Topix futures contracts was automatically suspended during the Tuesday morning session.
“A huge down day, then a huge up day. Nobody has experienced a market this crazy,” said Takeo Kamai, head of execution services at CLSA in Tokyo. “While the market has rebounded a lot, the bigger picture uncertainty remains — whether the Bank of Japan can now raise rates again this year, and whether the Fed will cut.”
The global sell-off has been exacerbated by the unwinding of the so-called yen carry trade, in which traders had taken advantage of Japan’s low interest rates to borrow in yen and buy riskier assets.
“Fundamentally, nothing significant has changed for the Japanese economy. It is the unwinding of the carry trade driving a lot of the momentum sells,” said Ray Sharma-Ong, head of multi-asset investment solutions for south-east Asia at Abrdn.
The rally was echoed across other Asian markets, with South Korea’s Kospi up 4.2 per cent on Tuesday. The Taiwanese stock index, which had its worst sell-off in history on Monday, closed 3.4 per cent higher as chipmaker TSMC climbed 8 per cent.
“Korea and Taiwan are more impacted by the broader sentiment on AI and concerns around [artificial intelligence] capex,” said Jason Lui, head of Apac equity and derivative strategy at BNP Paribas, referring to concerns that tech companies have invested too heavily in AI capacity.
Asian markets had reacted “excessively” to US economic risks and geopolitical tensions in the Middle East, Korean government officials said. They vowed to take swift action to stabilise the market in the case of excessive volatility. In Seoul, chipmakers Samsung Electronics and SK Hynix rose 2.2 per cent and 4.4 per cent on bargain hunting.
India’s benchmark equity indices the Nifty 50 and BSE Sensex were both up 1 per cent in early trading on Tuesday.
Shrikant Chouhan, head of equity research at Kotak Securities in Mumbai, said Indian markets had largely mirrored global moves, but that domestic mutual funds — which have seen historic inflows from local investors — would take advantage of any short-term dips. “In India, there’s hardly any negative newsflow,” said Chouhan. “The overall broad trend remains bullish”.
Atul Goyal, a Japan equities analyst at Jefferies, said that while fear was gripping markets, the fall in certain Japanese stocks on Monday had been “far too extreme”.
On Tuesday, a broad range of stocks in Tokyo soared, led by soy sauce maker Kikkoman, whose stock was up more than 20 per cent. Carmaker Honda gained more than 14 per cent, semiconductor equipment maker Tokyo Electron was up more than 16 per cent.
The BoJ interest rate increase last week propelled the yen higher and triggered a three-day equities sell-off, culminating in Monday’s dramatic fall. By Monday’s close, the Topix had lost all its gains for the year after hitting an all-time high on July 11.
Traders and analysts struggled to explain the extremity of Monday’s sell-off. “There must be some forced or technical selling as the fundamentals did not change by 11-12 per cent in one weekend,” said Kiran Ganesh, multi-asset strategist at UBS. He added that he saw a sharp sell-off as a buying opportunity.
Others, including Nicholas Smith, Japan strategist at CLSA, pointed to the exaggerated impact of algorithmic trading programs, which may have specifically responded to the recent sharp upward move in the yen.
“It does look like they are correlated with the yen,” Smith said. “After all the excitement about the prospects of AI, it now looks like AI may have got us into this mess.”
