Japanese Stocks Bounce Back as US Futures Rally: Markets Wrap

August 6, 2024

4 minutes read

(Bloomberg) — Japanese equities powered higher from the open leading gains in Asia, retracing some of the losses sustained in Monday’s global rout that wiped out billions across markets from New York to London. US equity futures also advanced and Treasuries fell.

Most Read from Bloomberg

Japan’s two key share gauges both jumped almost 11%, after tumbling in excess of 12% the day before. South Korea’s Kospi Index rallied more than 5%, while stocks in Hong Kong and mainland China also climbed. The initial positive signs suggest traders are catching their breath following a dramatic day in which Wall Street’s “fear gauge” – the VIX – at one point registered a record increase in data going back to 1990.

“As Japanese equities rebound, the rest of the Asian markets are likely to rebound together today,” said Tomo Kinoshita, a global market strategist at Invesco Asset Management in Tokyo. “As the magnitude of Japan’s stock price decline yesterday turned out to be much more than Europe and the US, the market participants now recognize that Japan’s market correction yesterday was excessive.”

Speculation about a looming US recession, an unwinding of artificial intelligence euphoria, and a surging yen leading to an unwind of carry trades had led to a three-day selling spree across global equities. Market veteran Ed Yardeni said the selloff bears some similarity to the 1987 crash, when the US economy averted a downturn despite investor fears at the time. Analysts at JPMorgan Chase & Co. and Morgan Stanley see shares staying under pressure.

The yen fell as much as 1.5% against the dollar Tuesday, before paring some of its declines. The currency has still gained almost 11% this quarter on expectations of further interest rates hikes by the Bank of Japan. The Nikkei 25 futures circuit breaker was triggered before the market opened after having suffered its biggest one-day slump in yen terms Monday. A sudden surge in Kospi 200 and Kosdaq 150 futures activated another “sidecar” in South Korea on Tuesday morning to briefly halt buy orders for program trading.

Japan’s market rout may have been exacerbated by forced margin selling. Retail investors’ margin buying position rose to a 18-year high in late July even as the Nikkei 225 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 to deploy.

Japan’s indexes both entered into a bear market Monday after a surge in the yen, a tighter monetary policy by the BOJ and a deteriorating economic outlook in the US.

Treasury yields rose across the curve at Asian open, 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 ISM services report.

“The hotter-than-expected ISM services report slowed the bleeding on Wall Street, which allowed the Nikkei to retrace its steps to find its key that it dropped during its 12% plunge on Monday,” 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.”

Federal Reserve Bank of San Francisco President Mary Daly said the labor market is softening and indicated the US central bank should begin cutting interest rates in coming quarters, but stopped short of concluding the labor market has begun seriously weakening.

“Policy adjustments will be necessary in the coming quarters,” Daly said Monday. “We have now confirmed that the labor market is slowing, and it is extremely important that we not let it slow so much that it tips itself into a downturn.”

Yardeni said the current equity selloff bears some similarity to the 1987 crash, when the economy averted a downturn despite investor fears at the time.

“This is very reminiscent, so far, of 1987,” Yardeni said in an interview on Bloomberg Television. “We had a crash in the stock market — that basically all occurred in one day — and the implication was that we were in, or about to fall into, recession. And that didn’t happen at all. It had really more to do with the internals of the market.”

Elsewhere in the Asian region, Australia’s central bank on Tuesday is expected to hold its cash rate at 4.35% for a sixth straight meeting, economists predict. The nation is poised to stay near the back of the global easing cycle as local inflation — while cooling — remains elevated requiring the Reserve Bank to keep its key interest rate at a 12-year high.

Oil rose from a seven-month low early Tuesday as the halting of production from Libya’s biggest field refocused attention on the Middle East.

Corporate Highlights:

Palantir Technologies Inc. raised its annual outlook, citing continuing demand for its artificial-intelligence software.
A federal judge on Monday ruled that Google has illegally monopolized the search market, hading the government an epic win in its first major antitrust case against a tech giant in more than two decades.
Nvidia Corp.’s upcoming artificial intelligence chips will be delayed due to design flaws, The Information reported, citing two unidentified people who help produce the chip and its server hardware.
Dell Technologies Inc. is cutting jobs as part of a reorganization of its sales teams that includes a new group focused on artificial intelligence products and services.
Tyson Foods Inc. shares surged, bucking a broad retreat in equity markets, as quarterly earnings beat the highest of analyst estimates on a rebound in chicken profits.

Key events this week: