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Japan’s equities gained after a holiday, as a weaker yen was seen providing support for exporters. MSCI’s Asia-Pacific gauge rose as much as 1%. That erased losses from last week’s tumble, when a risk-off move sent indexes around the world plummeting and the VIX US volatility index above 65 at one point, compared with a lifetime average of around 19.5.
Stocks in Hong Kong and mainland China fluctuated, as sentiment remains bearish after share transactions in China shrank to their lowest level in over four years. The S&P 500 closed little changed ahead of US inflation data later on Tuesday and Wednesday. Treasuries held Monday’s gains.
“The market’s reaction to last week’s VIX spike reflects a reassessment of positioning rather than just U.S. data points or yen carry unwinding,” said Billy Leung, an investment strategist at Global X Management in Sydney. “However, it’s key to be cautious in reading short-term Asia movements, given signs of foreign outflows and low liquidity.”
Oil remained near the $80 level it hit on Monday, as the US sees an Iranian attack against Israel as increasingly likely. Israel’s sovereign debt was cut by one notch by Fitch Ratings, which kept a negative outlook on the credit as continued military conflict weighs on the country’s public finances.
Asia’s stock benchmark had tumbled 6.1% last Monday to mark its worst day since 2008 as fears of a worsening US economy, an extended selloff in Japanese equities and a rotation away from tech shares weighed on the market.
Both the Nikkei 225 and the Topix are down more than 8% since the end of July, when the Bank of Japan raised its benchmark interest rate and unveiled plans to reduce its bond purchases. The benchmarks slid into a bear market on Aug. 5, when losses exceeded 20%.
The rate hike had spurred yen gains before the central bank commented that it won’t tighten so quickly as to risk further market volatility. Investors globally unwound carry trades, in which they had funded purchases of assets from stocks to emerging market bonds with the currency.
After last week’s turmoil, markets will be focused on Wednesday’s US consumer price index to see if the Fed will have a freer or more constrained hand in refocusing on the labour market and front-loading rate cuts sufficiently to secure a soft landing, according to Krishna Guha at Evercore.
“The first wave of yen carry trade unwind should be complete by now, and investor focus is now on US inflation and retail sales data to gauge the soft-landing probability,” said Linda Lam, head of equity advisory North Asia at Union Bancaire Privee. “Risk sentiment is on the mend with most Asian markets expected to stabilise at current range, barring major shocks that could dramatically change Fed interest rate cut trajectory,” she said.
Elsewhere in Asia, regulators told commercial banks in China’s Jiangxi province not to settle their purchases of government bonds, taking some of the most extreme measures yet to cool a market rally that has alarmed Beijing. At least four Chinese brokerages have started fresh measures to cut back trading of domestic debt beginning last week, people familiar with the matter said.
