Japanese equities powered higher on Tuesday, leading a global rebound as they retraced some of the losses sustained in a rout on Monday that erased billions across markets from New York to London.
Japan’s two key share gauges both jumped almost 11%, after tumbling more than 12% the day before, while a regional gauge halted a three-day decline. European and US equity futures also advanced.
The Stock Exchange of Thailand index jumped 14 points at the opening of trade but was unable to sustain the momentum, ending the day down 0.66 points at 1,274.01, after losing 38.41 points, or 2.9%, the day before.
The MSCI gauge of Asian emerging market equities outside of Japan rose as much as 2% to mark its best day since early June, after sliding 4.2% on Monday. The index that includes Japanese stocks advanced up to 4% as the Nikkei staged a sharp recovery.
Tech-heavy indices in Taiwan and the South Korea Kospi jumped up to 4.6% and 5.6%, respectively. In Southeast Asia, benchmarks in Indonesia, Malaysia, and Thailand added between 0.2% and 1.5%, although Singapore’s FTSE Straits Times fell 1% on pressure from banks.
“The size of the sell-offs seen thus far is too much and fears of a recession in the US economy have eased,” said Ryota Abe, an economist at SMBC. “Market sentiment will improve with some higher caution on the global economy and the geopolitical risks than before.”
The initial positive signs in Asia suggest traders are catching their breath following a dramatic day in which almost every risk asset were sold.
“The market reaction was a bit extreme yesterday and hence we see this sharp rebound today,” said Rupal Agarwal, Asia quantitative strategist at the securities firm Sanford C Bernstein. “I would expect markets to remain volatile and hence would stick to looking for late cycle defensive exposure through quality/dividend yielding names.”
Speculation about a looming US recession, an unwinding of artificial intelligence euphoria that had sent tech shares soaring, and a surging yen causing an unwind of carry trades had led to a three-day selling spree across global equities.
While markets have rebounded, Wall Street’s “fear gauge” — the Volatility Index or Vix — remains elevated, suggesting that risk assets will face hurdles with continued uncertainty over the economic outlook. The Vix at one point on Monday posted a record increase in data going back to 1990.
US Treasury yields rose across the curve in Asia, with the benchmark 10-year yield climbing five basis points to 3.84%. The yield had fallen as low as 3.67% Monday before being pushed back up by a stronger-than-expected US services report.
“The hotter-than-expected ISM services report slowed the bleeding on Wall Street,” said Matt Simpson, a senior market strategist at City Index Inc. “So we’re not seeing a risk on rally as such, but a healthy correction after an unhealthy selloff, triggered by investors stampeding for a tiny exit.”
The yen fell as much as 1.5% on Tuesday, before paring some of its losses. The currency has still gained about 11% this quarter on expectations of further interest rate increases by the Bank of Japan. The Nikkei 225 futures circuit breaker was triggered before the market opened as Monday’s savage selloff was deemed overdone.
A surge in Kospi 200 and Kosdaq 150 futures activated another “sidecar” in South Korea on Tuesday morning, briefly halting buy orders for program trading.
Japan’s market rout may have been worsened by forced margin selling. Retail investors’ margin buying position rose to a 18-year high in late July, even as the Nikkei slipped from its historic peak.
Investors who have bought stocks using credit are often forced to close their positions when stock prices fall more than expected, unless they have enough extra cash for collateral.
The selloff pushed Japan’s key share indices into a bear market on Monday. An auction of 10-year sovereign notes on Tuesday met the weakest investor demand since 2003 by one measure, as expectations of more rate hikes deterred investors.