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Wall Street stocks rebounded on Tuesday as markets stabilised from the previous day’s global rout, following a much sharper comeback for Japanese equities.
The S&P 500 climbed 2.2 per cent by mid-afternoon in New York, after losing 3 per cent on Monday. The tech-heavy Nasdaq Composite was up 2.4 per cent. European stocks notched up smaller gains, with the region-wide Stoxx Europe 600 closing 0.2 per cent higher.
The moves came after Japan’s Topix index surged 9.3 per cent while the yen stabilised at about ¥145.70 following its recent lightning rally. The tech-heavy Nikkei 225 rose 10.2 per cent.
The return of relative calm comes after global markets 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 rapid interest rate cuts. Tokyo’s stock market had been hardest hit, plunging more than 12 per cent on Monday, days after an unexpected rate rise by the Bank of Japan.
Tuesday’s rebound in Japan was so intense that trading in Nikkei and Topix futures contracts was automatically suspended during the 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 rally was echoed across other Asian markets, with South Korea’s Kospi up 3.3 per cent on Tuesday. Taiwan’s stock index, which had its worst sell-off in history on Monday, closed 3.4 per cent higher as chipmaker Taiwan Semiconductor Manufacturing Company climbed 8 per cent.
Asian markets had reacted “excessively” to US economic risks and geopolitical tensions in the Middle East, said South Korean government officials. 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 1.5 per cent and 4.9 per cent respectively.
But the rebound in European and US trading was more tentative, amid lingering concerns after Monday’s sell-off.
“Although the scale of the reduction was exaggerated, the reality is that there is a bit more concern about the US economy in the short term,” said Charles Hall, head of research at Peel Hunt. “That will make people feel nervous about equities. So I think it’s logical that we don’t see a rapid bounce back.”
The global sell-off had 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 then buy riskier assets.
Ray Sharma-Ong, head of multi-asset investment solutions for south-east Asia at Abrdn, said: “Fundamentally, nothing significant has changed for the Japanese economy. It is the unwinding of the carry trade driving a lot of the momentum sells.”
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”.
The BoJ interest rate increase last week propelled the yen higher and triggered a three-day equities sell-off, culminating in Monday’s 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 ferocity of Monday’s sell-off. “There must be some forced or technical selling as the fundamentals did not change by 11 to 12 per cent in one weekend,” said Kiran Ganesh, multi-asset strategist at UBS. He added he regarded 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 [artificial intelligence], it now looks like AI may have got us into this mess.”
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