Asian stocks rebound amid global volatility

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Japanese stocks on Tuesday surged, leading markets higher across Asia in a striking reversal of the previous day’s global sell-off.

Amid warnings from traders to expect extraordinary volatility, the broad Topix rebounded more than 10 per cent as investors began bargain-hunting and the yen stabilised at about ¥144.607 after rising sharply in recent weeks.

The Topix recovery and the 10 per cent resurgence in the narrower, tech-heavy Nikkei 225 Average, came despite heavy overnight falls in US markets, including a 3 per cent drop in the S&P 500. US equity futures have since risen in Asian trading hours.

Global markets have tumbled in recent days amid fears the Federal Reserve has been too slow to respond to signs the US economy was weakening, and might be forced to play catch-up with a series of rapid interest rate cuts. Hardest hit, though, have been Japanese stocks, which plunged more than 12 per cent on Monday, days after a surprise Bank of Japan rate rise.

Tuesday’s rebound proved equally eye-catching. At one stage, the Nikkei 225 Average was up 3,453 points — its biggest-ever 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 4.3 per cent in morning trading. The Taiwanese stock index, which had its worst sell-off in history on Monday, recovered 3.6 per cent as chipmaker TSMC climbed almost 10 per cent at one point.

“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.

Western stock markets also appear poised to rally. Contracts tracking Wall Street’s S&P 500 and tech-heavy Nasdaq 100 have risen 1.5 per cent and 2.1 per cent respectively ahead of the New York open, while futures for the Euro Stoxx 50 and FTSE 100 are up 1 per cent.

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 and semiconductor equipment maker Tokyo Electron both gained more than 17 per cent. Financials, telecoms, industrials and parts of the tech sector were the main focus of buying in Japan.

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 a sharp sell-off presented 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.”