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US stocks clawed back some of their recent losses on Tuesday, rounding off a day of rebounds in global stock markets after a sharp sell-off during the previous two sessions.
Wall Street’s benchmark S&P 500 closed 1 per cent higher, after losing 3 per cent on Monday. The tech-heavy Nasdaq Composite also rose 1 per cent.
The return of risk appetite was reflected in lower government bond prices and a pullback in the Vix, the so-called fear gauge that shows investor expectations of market swings over the next month.
“A lot of [Monday’s] market action seemed to be technical due to excess optimism in positioning and sentiment going into it,” said Sébastien Page, head of global multi-asset at T Rowe Price. “Volatility like this doesn’t just pop one day and then go away . . . [but] we might see these types of markets as an opportunity to buy.”
The Vix index fell from 38.6 to 27.7 — well below Monday’s intraday peak of over 60, but still above its long-term average of 20. The yield on the 10-year Treasury note, which rises when prices fall, jumped 0.1 percentage points, to 3.9 per cent.
The return of relative calm came after global markets tumbled in recent days on fears that the Federal Reserve had been too slow to respond to signs of a cooling US economy, and that it could be forced to implement rapid interest rate cuts.
The improvement in the US followed more modest gains in European markets and a sharp turnaround in Japan. Tokyo’s stock market had been hardest hit on Monday, with the Topix index plunging more than 12 per cent, days after an unexpected rate rise by the Bank of Japan.
On Tuesday, in contrast, the Topix surged 9.3 per cent while the yen stabilised at about ¥145.70 following its recent lightning rally. The tech-heavy Nikkei 225 rose 10.2 per cent.
Tuesday’s rebound in Japan was so intense that trading in Nikkei and Topix futures contracts was automatically suspended during the morning session.
“Nobody has experienced a market this crazy,” said Takeo Kamai, head of execution services at CLSA in Tokyo. “While the market has rebounded a lot, the bigger picture uncertainty remains — whether the Bank of Japan can now raise rates again this year, and whether the Fed will cut.”
The rally was echoed across other Asian markets, with Taiwan’s stock index, which had its worst sell-off in history on Monday, closing 3.4 per cent higher as chipmaker Taiwan Semiconductor Manufacturing Company climbed 8 per cent.
Asian markets had reacted “excessively” to US economic risks and geopolitical tensions in the Middle East, said South Korean government officials. They vowed to take swift action to stabilise the market in the case of excessive volatility. In Seoul, chipmakers Samsung Electronics and SK Hynix rose 1.5 per cent and 4.9 per cent respectively.
European stocks notched up smaller gains, with the region-wide Stoxx Europe 600 closing 0.2 per cent higher. The more tentative recovery highlighted lingering concerns after Monday’s sell-off.
“Although the scale of the reduction was exaggerated, the reality is that there is a bit more concern about the US economy in the short term,” said Charles Hall, head of research at Peel Hunt. “That will make people feel nervous about equities. So I think it’s logical that we don’t see a rapid bounce back.”
The global sell-off had been exacerbated by the unwinding of the so-called yen carry trade, in which traders had taken advantage of Japan’s low interest rates to borrow in yen then buy riskier assets.
Ray Sharma-Ong, head of multi-asset investment solutions for south-east Asia at Abrdn, said: “Fundamentally, nothing significant has changed for the Japanese economy. It is the unwinding of the carry trade driving a lot of the momentum sells.”
The BoJ interest rate increase last week propelled the yen higher and triggered the equities selling that culminated in Monday’s fall.
Traders and analysts struggled to explain the ferocity of Monday’s sell-off. “There must be some forced or technical selling as the fundamentals did not change by 11 to 12 per cent in one weekend,” said Kiran Ganesh, multi-asset strategist at UBS.
Others, including Nicholas Smith, Japan strategist at CLSA, pointed to the exaggerated impact of algorithmic trading programs, which may have specifically responded to the recent sharp upward move in the yen.
“After all the excitement about the prospects of [artificial intelligence], it now looks like AI may have got us into this mess,” Smith said.