Japan leads Asia rebound after Monday mayhem but analysts warn volatility will persist

Japanese equities traded higher on Tuesday, driving gains across Asia as they recovered significantly from a global market sell-off on Monday that wiped out billions globally.

The Nikkei Stock Average in Tokyo closed 10.2% higher on Tuesday, recovering a major part of the losses that it incurred a day before when it fell by almost 13%.

The decline happened amid a wild sell-off triggered majorly by weak US jobs data hinting at the economy heading towards recession and anticipating a series of rate cuts by the Federal Reserve.

The increase in interest rates in Japan further led to the unwinding of the yen carry trade. Topix closed 9.30% higher.

South Korea’s Kospi Index rallied over 3%, contributing to a broader regional recovery after a three-day decline.

India’s BSE Sensex opened 1% higher from the previous day’s close of 78,759.40- a level it hit after falling 2.7% on Monday.  

The yen stabilised at about ¥144.607 after rising sharply in recent weeks.

In the US, futures tied to the S&P 500 were up 1.5% while the tech-heavy Nasdaq 100 had risen by 2.1% ahead of the New York open.

Futures for the Euro Stoxx 50 and FTSE were up 1%. 

Tomo Kinoshita, a global market strategist at Invesco Asset Management in Tokyo told Bloomberg:

As Japanese equities rebound, the rest of the Asian markets are likely to rebound together today.

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.

Volatility in Japan, world, likely to remain, analysts warn not to cheer just yet

Global markets have been beset with an extreme kind of volatility, especially since Friday when the US jobs data was released. 

The CBOE Volatility Index based on the S&P 500 on Monday breached 60, touching its highest level since the market plunged during the pandemic in 2020. It cooled later to 23. 

Mohamed A El Erian, chief economic advisor at Allianz, said,

As stocks bounce back, led by Japan, many will be tempted to dismiss the volatility of the last few days as typical of the wild west nature of less-liquid, trader-led markets. A better approach would be to focus on the importance of restoring the dual anchors of solid growth and credible central bank policymaking.

The broad consensus among analysts is that the extreme market reaction on Monday was likely driven by a combination of forced or technical selling and algorithmic trading programs responding to a sharp increase in the yen. 

Analysts believe that the fundamentals did not change significantly over the weekend to justify such a dramatic sell-off, indicating that the drop was more technical. 

Despite the rebound on Tuesday, there is an expectation that markets will remain volatile.

Analysts from UBS Chief Investment Office wrote in a research report on Tuesday that short-term volatility in the Japanese stock market remains as the market now believes the US dollar has not yet stabilized against the Japanese yen.

“It is too early to conclude that the Japanese stock market has hit a bottom,” they said, adding that any recovery would likely only occur after Japanese corporates report first-half earnings in October, or even after the US presidential election in November.

Analysts in Asia recommend focusing on defensive stocks with quality and dividend yields during this period of market instability.

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