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Japanese stocks 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 US futures also climbed.
Uchida’s comments offered much-needed reassurance to markets at a time when investors remained concerned whether the recent unwinding of the yen carry trade has run its course. The BOJ’s softening stance also served to remove one major uncertainty as traders continued to assess if the recent global selloff was an overreaction to weak US economic data.
“Uchida-san’s comments can bring some stability to the Japanese equity market for now, but it cannot take the focus away from US economic data and recession concerns,” said Charu Chanana, head of currency strategy at Saxo Markets. “Putting in fresh carry trades remains tough in this environment of higher volatility and nervousness about the US economy.”
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.
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 Mexican peso, another carry trade target, also rose over 1% against the dollar on Wednesday. The Australian dollar and its New Zealand counterpart both advanced too.
Back in equities, a broad Asian gauge rose 1.7%. Chinese shares inched higher after four consecutive days of losses, with all eyes on a fresh set of the country’s trade data due later on Wednesday.
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.
Treasury 10-year yields rose one basis point in Asian trading after jumping 10 basis points to 3.89% Tuesday. Oil slid.
“We would characterise 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.
