6-8-2024 (TOKYO) Asian stock markets staged a remarkable recovery on Tuesday, with Japanese shares leading the charge after a historic sell-off the previous day. The turnaround came as central bank officials offered reassuring statements, effectively soothing frayed investor nerves across the region.
The Nikkei 225, Japan’s benchmark index, surged more than 8% in early trading, breaching the 34,000 mark. This dramatic rebound followed Monday’s catastrophic 12.4% plunge, which had marked the index’s worst performance since the infamous Black Monday crash of 1987.
The positive sentiment spread beyond Japan, with circuit breakers triggered in some Asian markets due to the intensity of the recovery. Wall Street also showed signs of stabilisation, as S&P 500 futures climbed 0.9% and Nasdaq futures rose 1.2% in early trade.
Chris Weston, head of research at broker Pepperstone, commented on the day’s events: “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.” However, he cautioned that the Nikkei’s implied volatility remained at a staggering 70%, suggesting that market turbulence could persist.
Currency markets also reflected a reversal of Monday’s sharp movements. The dollar edged up to 145.64 yen, recovering from its previous day’s low of 141.675. This shift came as investors unwound so-called “carry trades”, where they had borrowed yen at low rates to invest in higher-yielding assets.
In the bond market, U.S. Treasury yields rebounded from their lows, partly in response to an unexpected improvement in the U.S. ISM services index, which rose to 51.4 for July. The employment component of this index jumped five points to 51.1, suggesting that last week’s payrolls report may have overstated the weakness in the labour market.
Boris Kovacevic, a global macro strategist at payments firm Convera, offered his perspective: “Gauging the bottom of such historic selloffs is complicated, and investors will most likely remain cautious before pouring capital back into equity markets.” He added that the yen’s recent 12% fall against the dollar over the past five weeks had left it vulnerable to any positive surprises in U.S. economic data.
Federal Reserve officials played a crucial role in steadying market sentiment. Mary Daly, President of the San Francisco Fed, emphasised the importance of preventing a labour market downturn and expressed openness to interest rate cuts if necessary. These comments bolstered market expectations of a significant 50 basis point rate cut at the Fed’s September meeting.
In commodities, gold failed to benefit from its traditional safe-haven status, with spot prices holding at $2,409 an ounce after a 1.52% decline on Monday. Oil markets, however, saw an early Tuesday bounce following news of an attack on a U.S. military base in Iraq, which stoked fears of wider conflict.
