Japanese shares lead rebound in Asia, yen falls: market turnaround

(Bloomberg) — Japanese shares rose higher, leading gains in Asia as they recouped some of the losses suffered in Monday’s global rout that wiped out billions from markets from New York to London. US stock futures also advanced and government bonds fell.

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Japan’s two main stock indexes both rose almost 11% after falling more than 12% the day before, while South Korea’s Kospi Index rose more than 3%. Stock markets in Hong Kong and mainland China were subdued. Early positive signs suggest traders are catching their breath after a dramatic day that saw Wall Street’s “fear gauge” – the VIX – at one point record a record jump in numbers dating back to 1990.

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

Speculation about a looming US recession, the end of artificial intelligence euphoria and a rising yen putting an end to carry trades had led to a three-day sell-off in global equities. Market veteran Ed Yardeni said the sell-off bears some resemblance to the 1987 crash, when the U.S. economy staved off a downturn despite investor fears at the time. Analysts at JPMorgan Chase & Co. and Morgan Stanley see that the shares remain under pressure.

The yen fell as much as 1.5% on Tuesday before recouping some of its declines. That said, the currency is still up about 11% this quarter on expectations of further rate hikes from the Bank of Japan. The Nikkei 25 futures circuit breaker was triggered before the market opened, after suffering the biggest single-day drop in yen terms on Monday. A surge in Kospi 200 and Kosdaq 150 futures triggered a new “sidecar” in South Korea on Tuesday morning to briefly halt buy orders for program trading.

The market disruption in Japan may have been exacerbated by forced margin selling. Retail investors’ margin buying rose to an 18-year high in late July, even as the Nikkei 225 fell from its all-time high. Investors who have bought stocks with credit are often forced to close their positions when stock prices fall more than expected unless they have enough extra money to put up collateral.

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Japan’s major stock indexes entered a bear market on Monday after a rise in the yen, tighter monetary policy from the BOJ and a deteriorating economic outlook in the US.

Japan’s finance ministry will sell ¥2.6 trillion ($18 billion) of bonds maturing in June 2034 after 10-year yields fell 20.5 basis points on Monday, the highest level since 1999.

Government bond yields rose across the curve in Asia, with the benchmark 10-year yield rising five basis points to 3.84%. Yields had fallen to 3.67% on Monday before being pushed back up by a stronger-than-expected US ISM services report.

“The better-than-expected ISM services report slowed the bleeding on Wall Street,” said Matt Simpson, senior market strategist at City Index Inc. “We therefore see no risk on the rally as such, but a healthy correction afterwards. an unhealthy sell-off caused by investors rushing for a small exit.”

The S&P500 Index fell 3% on Monday, its biggest single-day decline since September 2022, while the Cboe Volatility Index, or VIX, rose to 38.57, 1.1 times the level of the VXN, a comparable measure to the Nasdaq 100. Futures on the S&P The 500 Index and the Nasdaq 100 rose during Asian trading hours.

President Mary Daly of the Federal Reserve Bank of San Francisco said the labor market is weakening and indicated the U.S. central bank should begin cutting interest rates in the coming quarters, but stopped short of concluding that the labor market is seriously starts to weaken.

The swap market is pricing in a Fed rate cut of almost 50 basis points in September, while Bloomberg data shows expectations for lower policy rates in the coming months have increased in Korea, Thailand and Malaysia.

Yardeni said the current stock sell-off bears some resemblance to 1987, when the U.S. economy staved off a downturn despite investor fears at the time.

“This is very reminiscent of 1987 so far,” Yardeni said in an interview on Bloomberg Television. “We had a stock market crash – which actually happened all in one day – and the implication was that we were in a recession, or about to be in one. And that didn’t happen at all. It actually had more to do with the internal workings of the market.”

Australia’s central bank is expected to keep cash rates at 4.35% for the sixth time in a row on Tuesday, economists predict. The country is poised to remain at the tail end of the global easing cycle as local inflation – even as it cools – remains high, forcing the Reserve Bank to keep its key interest rate at a 12-year high.

Oil rose from a seven-month low as halts in production from Libya’s biggest oil field turned attention back to the Middle East. Bitcoin returned to the highs of $56,000 after a period of risk aversion in global markets inflicted steep losses on most major cryptocurrencies.

Main events this week:

• Tariff decision Australia, Tuesday

• Eurozone retail sales, Tuesday

• Chinese trading, currency reserves, Wednesday

• US consumer credit, Wednesday

• Germany industrial production, Thursday

• First unemployment claims in the US, Thursday

• The Fed’s Thomas Barkin will speak on Thursday

• China PPI, CPI, Friday

Some of the major moves in the markets:

Shares

• S&P 500 futures rose 1.3% as of 11:38 a.m. Tokyo time

• Japan’s Topix rose 9.3%

• Australia’s S&P/ASX 200 rose 0.3%

• Hong Kong’s Hang Seng rose 0.1%

• The Shanghai Composite rose 0.1%

• Euro Stoxx 50 futures rose 0.8%

Currencies

• The Bloomberg Dollar Spot Index was little changed

• The euro was little changed at $1.0953

• The Japanese yen fell 0.6% to 145.05 per dollar

• The offshore yuan fell 0.1% to 7.1471 per dollar

Cryptocurrencies

• Bitcoin rose 3% to $56,014.09

• Ether rose 3.4% to $2,519.43

Bonds

• The yield on ten-year government bonds rose by five basis points to 3.84%

• The Japanese ten-year yield rose by 16 basis points to 0.910%

• The Australian ten-year yield fell by seven basis points to 3.98%

Raw materials

This story was produced with the help of Bloomberg Automation.

–With help from Rita Nazareth, Winnie Hsu, Jason Scott, Sangmi Cha and Matthew Burgess.

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