(Bloomberg) — Asian stocks rallied after the Bank of Japan’s deputy governor said it won’t raise interest rates if markets are unstable, reassuring investors unnerved by a recent surge in the yen.
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Japan’s two key stock gauges both rose after the yen fell by more than 2% against the dollar. Bank of Japan’s Deputy Governor Shinichi Uchida noted the recent volatility in Japanese markets, saying the BOJ’s rate path will shift if there’s an impact on the policy outlook. Stocks in Taiwan and South Korea extended gains, while a regional gauge rallied 1.7%.
Traders are weighing whether the recent global selloff is an overreaction to weak US economic data, with Goldman Sachs Group’s data showing that hedge funds took advantage of Monday’s rout to buy stocks. In Asia, the question is whether the worst of an unwinding of yen carry trades and leveraged positions in Japanese stocks is over.
“The critical element for Japanese, and as we’ve seen, global equities, is the strength of the yen, which is itself an expression of the US economic outlook,” said Kyle Rodda, a senior market analyst at Capital.Com. “For now, the USDJPY is waffling around 145. If it remains fairly non-volatile and perhaps grinds higher, it will support a Nikkei recovery and a return to normalcy.”
The S&P 500 and Nasdaq 100 rose on Tuesday — following a Japan-led rebound in Asia — with both climbing 1% after a global meltdown. Wall Street’s “fear gauge” — the VIX — saw its biggest plunge since 2010. Traders also moderated expectations of Federal Reserve rate cuts this year, with swaps predicting around 105 basis points of easing, versus as much as 150 basis points on Monday.
The yen carry trade unwinding among speculative investors was 50% to 60% done, Arindam Sandilya, co-head of global FX strategy, said on Bloomberg TV. Investors using the cheap currency to fund investments in higher-yielding assets were caught out when the yen surged 11% over the past month.
The Nikkei and the Topix indexes slid into a bear market on Monday after they dropped 20% from their July peaks. The Nikkei’s implied volatility touched its highest level since 2008 at the start of the week.
Treasury 10-year yields were up slightly after jumping 10 basis points to 3.89% Tuesday.
Elsewhere, the New Zealand dollar strengthened after the jobless rate rose less than expected. Oil fell after an industry report indicated a buildup in US inventories after five weeks of declines.
“We would characterize the recent market pullback as a textbook correction, after months of low volatility so far in 2024,” said Carol Schleif at BMO Family Office. “The lack of volatility before the past few weeks is unusual, and our current correction is actually quite normal, especially during August, which historically is a volatile time for markets given lighter trading volumes and the summer doldrums.”
A semblance of calm returned to markets on Tuesday, following a pullback fueled by weak economic data, underwhelming tech results, stretched positioning and poor seasonal trends. The wall of worry the market built up over the past few days drove the S&P 500 to the brink of a correction, with a drawdown of about 8.5% from the highs.
Key events this week:
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 were little changed as of 9:44 a.m. Tokyo time
Hang Seng futures rose 0.5%
Nikkei 225 futures (OSE) rose 0.3%
Japan’s Topix rose 0.5%
Australia’s S&P/ASX 200 fell 0.2%
Euro Stoxx 50 futures rose 0.5%
Nasdaq 100 futures were little changed
Currencies
The Bloomberg Dollar Spot Index was little changed
The euro was little changed at $1.0926
The Japanese yen fell 0.5% to 145.11 per dollar
The offshore yuan was little changed at 7.1627 per dollar
The Australian dollar rose 0.2% to $0.6532
Cryptocurrencies
Bitcoin fell 0.8% to $56,114.51
Ether fell 1.5% to $2,452.71
Bonds
The yield on 10-year Treasuries advanced one basis point to 3.90%
Japan’s 10-year yield was unchanged at 0.890%
Australia’s 10-year yield advanced six basis points to 4.08%
Commodities
West Texas Intermediate crude fell 0.3% to $73.01 a barrel
Spot gold fell 0.4% to $2,382.63 an ounce
This story was produced with the assistance of Bloomberg Automation.
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