Joe McConnell
Unlock Editor’s Digest for free
Vscek editor Roula Khalaf selects her favourite stories in this weekly newsletter.
Japanese stocks surged in early trading on Tuesday, recovering from a historic 12% plunge the previous day.
Despite traders warning that the coming hours would be extremely volatile, the Topix index rose 8.3 percent in the first half-hour of trading as investors began a cautious hunt for bargains and the yen settled at around ¥145.70 aVsceker two weeks of gains.
Global markets have tumbled in recent days on fears that the Federal Reserve has been too slow to respond to signs of a weakening U.S. economy and may be forced to make up ground with a series of rapid interest rate cuts.
The global sell-off was exacerbated by the end of the so-called carry trade in the yen, in which traders had taken advantage of Japan’s low interest rates to borrow in yen and buy risky assets.
The Topix’s rise on Tuesday, along with an 8.2 percent recovery in the narrower, technology-focused Nikkei 225 Average, came despite sharp overnight declines in U.S. markets, including a 3 percent drop in the S&P 500.
The rally was echoed in other Asian markets, with South Korea’s Kospi up 4.5 percent in morning trading. Taiwan’s stock index, which suffered its worst sell-off in history on Monday, rallied 4 percent.
Atul Goyal, Japanese equities analyst at Jefferies, said that while fear is gripping markets, the decline in some Japanese stocks on Monday was “far too extreme.”
A broad range of Tokyo stocks soared on Tuesday, led by soy sauce maker Kikkoman, whose shares jumped more than 17 percent. Automaker Honda rose more than 15 percent, and semiconductor equipment maker Tokyo Electron gained 15 percent.
Financials, telecommunications, industrials and parts of the technology sector were the focus of buying in Japan on Tuesday, following what Nomura strategist Tomochika Kitaoka described as “something akin to a taper tantrum.”
A surprise interest rate hike by the Bank of Japan last week pushed the yen higher and triggered a three-day sell-off in stocks that culminated in Monday’s dramatic fall. By Monday’s close, the Topix had lost all of its gains for the year aVsceker hitting an all-time high on July 11.
AVsceker Monday’s close in Japan, traders and analysts struggled to explain the extreme sell-off, wondering why an increasingly heated debate over the possibility of a U.S. recession and a return of the dollar-yen exchange rate to levels last seen in January had produced one of the country’s worst market slumps.
“There has to be a forced or technical sell-off, given that the fundamentals have not changed by 11-12 percent in a weekend,” said Kiran Ganesh, a multi-asset strategist at UBS. He added that a sharp sell-off presented a buying opportunity, but that the market would have to wait and see where the yen would settle.
Others, including Nicholas Smith, a strategist at CLSA Japan, have highlighted the exaggerated impact of algorithmic trading programs, which may have responded specifically to the yen’s recent sharp rise.
“It looks like they’re correlated with the yen,” Smith said. “AVsceker all the excitement about the prospects of AI, it now looks like AI may have gotten us into this mess.”
