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Japanese stocks surged on Tuesday, leading markets across Asia higher in a contrast to the previous day’s global selloff, while European stocks also clawed back some of their losses.
Japan’s broad Topix index closed up 9.3% as traders warned of huge volatility, while the yen settled around ¥145.70 per dollar after a sharp rally in recent weeks. The tech-heavy Nikkei 225 rose 10.2%.
European stocks also pared back some of their losses in early trading but avoided a dramatic rebound. Across the region, the Stoxx 600 index rose 0.6%. France’s Cac 40 was steady, Germany’s Dax rose 0.6% and Britain’s FTSE 100 rose 0.3%.
U.S. futures also signaled a rebound when markets opened in New York. Contracts tracking the S&P 500 were expected to rise 1.1%, while the Nasdaq 100 was expected to rise 1.5%.
Global markets have tumbled in recent days amid concerns that the Federal Reserve is too slow to respond to signs that the U.S. economy is cooling and will be forced to follow suit with a series of sharp rate cuts. Japanese stocks have been among the hardest hit, falling more than 12% on Monday, days after the Bank of Japan raised interest rates.
Tuesday’s rebound was also notable. At one point, the Nikkei 225 Average rose 3,453 points, the largest intraday surge. The surge in Japanese stocks was so intense that trading in Nikkei and Topix futures contracts was automatically halted during the morning session Tuesday.
“A huge downturn, then a huge upturn. Nobody has ever experienced this crazy market,” said Takeo Kamai, head of execution services at CLSA in Tokyo. “The market has recovered a lot, but there is still uncertainty about the bigger picture: whether the Bank of Japan will raise rates again this year, and whether the Fed will cut rates.”
The global selloff was exacerbated by the unwinding of the so-called yen carry trade, where investors took advantage of low interest rates in Japan to borrow money in yen and buy risky assets.
“Fundamentally, there is no major change in the Japanese economy. There is a lot of momentum selling as the carry trade unwinds,” said Ray Sharma-Ong, head of Southeast Asia multi-asset investment solutions at Abrdn.
The rally was echoed in other Asian markets, with South Korea’s Kospi up 4.2% on Tuesday. Taiwan’s stock index, which suffered its worst selloff in history on Monday, rose 3.4%, led by an 8% gain in chipmaker TSMC.
“South Korea and Taiwan are more affected by the broader sentiment and concerns about AI. [artificial intelligence] Jason Lui, head of Asia Pacific equity and derivatives strategy at BNP Paribas, said “capex” was severe, citing concerns that tech companies had invested too much in AI capabilities.
South Korean government officials said Asian markets had reacted “overly” to economic risks in the U.S. and geopolitical tensions in the Middle East. They vowed to take swift action to stabilize markets if there was excessive volatility. In Seoul, semiconductor makers Samsung Electronics and SK Hynix rose 2.2% and 4.4%, respectively, to buy on discount.
India’s benchmark stock indexes Nifty 50 and BSE Sensex were both up 1% in early trade on Tuesday.
Shrikant Chauhan, head of equity research at Kotak Securities in Mumbai, said while Indian markets have largely mirrored global movements, domestic mutual funds, which have seen historic inflows from local investors, will capitalise on the short-term downturn. “There is very little negative news flow from India,” Chauhan said. “The overall broad trend remains bullish.”
Atul Goyal, Japan equity analyst at Jefferies, said fear was gripping the market but that the decline in certain Japanese stocks on Monday was “too extreme.”
A wide range of Tokyo stocks surged on Tuesday, with soy sauce maker Kikkoman up more than 20%, automaker Honda up more than 14%, and semiconductor equipment maker Tokyo Electron up more than 16%.
Last week’s BoJ rate hike sent the yen higher and triggered a three-day stock selloff that led to Monday’s dramatic decline. By Monday’s close, the Topix had lost all of its gains for the year since hitting a record high on July 11.
Traders and analysts struggled to explain the severity of Monday’s selloff. “There was probably a forced or technical selloff because the fundamentals didn’t change 11-12% over the weekend,” said Kiran Ganesh, a multi-asset strategist at UBS. He added that he viewed the sharp selloff as a buying opportunity.
Others, including CLSA’s Japan strategist Nicholas Smith, have pointed to the exaggerated influence of algorithmic trading programs that may have been particularly responsive to the yen’s recent surge.
“It seems to be correlated with the yen,” Smith said. “Despite all the excitement around AI, it may now be that AI got us into this mess.”
