Japanese Equities Lead Asia Rebound, Yen Declines: Market Wrap

(Bloomberg) — Japanese equities powered higher, leading gains in Asia, as they retraced 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.

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Japan’s two key share gauges both jumped almost 11%, after tumbling in excess of 12% the day before, while South Korea’s Kospi Index rallied more than 3%. Stocks in Hong Kong and mainland China were muted. 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 causing 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% Tuesday, before paring some of its declines. That said, the currency has still gained about 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 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.

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Japan’s key share 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.

Japan’s Ministry of Finance will sell ¥2.6 trillion ($18 billion) of bonds maturing in June 2034 after the 10-year yield slid Monday by 20.5 basis points, the most since 1999.

Treasury yields rose across the curve in Asia, 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,” 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.”

The S&P500 Index sank 3% Monday, its biggest one-day drop since September 2022 while the Cboe Volatility Index, or VIX, jumped to 38.57, 1.1 times the level of the VXN, a similar measure for the Nasdaq 100. Futures on the S&P 500 Index and the Nasdaq 100 rose in Asian trading hours.

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.

The swaps market is pricing in a near 50-basis-point Fed rate cut in September, while data compiled by Bloomberg show expectations for lower policy rates in the coming months have intensified in Korea, Thailand and Malaysia.

Yardeni said the current equity selloff bears some similarity to 1987 when the US 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.”

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 as the halting of production from Libya’s biggest field refocused attention on the Middle East. Bitcoin inched back to briefly top $56,000 after a bout of risk aversion in global markets inflicted steep losses on most major cryptocurrencies.

Key events this week:

• Australia rate decision, Tuesday

• Eurozone retail sales, Tuesday

• China trade, forex reserves, Wednesday

• US consumer credit, Wednesday

• Germany industrial production, Thursday

• US initial jobless claims, Thursday

• Fed’s Thomas Barkin speaks, Thursday

• China PPI, CPI, Friday

Some of the main moves in markets:

Stocks

• 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 10-year Treasuries advanced five basis points to 3.84%

• Japan’s 10-year yield advanced 16 basis points to 0.910%

• Australia’s 10-year yield declined seven basis points to 3.98%

Commodities

This story was produced with the assistance of Bloomberg Automation.

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

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