Strong recovery of all global stock markets, erasing all losses from the previous day

The Japanese stock market recovered by more than 10 percent on Tuesday, after recording a record drop the day before, while other Asian stock markets are also recovering after sharp corrections due to fears of a possible recession in the world’s largest economy, and instabilities in the foreign exchange markets are also calming down.

The MSCI index of Asia-Pacific stocks excluding Japan was up about three percent around 6:00 AM.

At the same time, the Nikkei index was up as much as 10.47 percent, completely erasing losses from the previous day, when it plunged 12.4 percent and recorded the largest daily percentage loss since Black Monday in 1987 due to investor fears that the US could slip into recession due to weak employment and industrial activity indicators in July.

The correction in stock prices on the Tokyo Stock Exchange was also contributed by the gradual halt of the so-called linked trading, in which investors take loans in Japanese currency, which has so far been cheap and interest rates in Japan ultra-low, to finance purchases of risky high-yield assets elsewhere in the world.

Additionally, last week the Bank of Japan raised interest rates to 0.25 percent, a level not seen in the country for the past 15 years, and announced that it would reduce its substantial purchases of government bonds, and according to Daiwa Securities strategist Kenji Abe, this scared the market that the central bank might tighten monetary policy too quickly.

– The collapse on Monday is a reminder that it is almost impossible to diversify stock risk by region or sector or investment style during major corrections or bear markets. Opportunities will arise again, but in our opinion, it is too early to jump back into the market at this time – said Stephen Dover, chief market strategist and head of the Franklin Templeton Institute at Franklin Templeton.

Other Asian markets are also recovering this morning, with the South Korean Kospi up 4.3 percent, the Australian ASX up 0.44 percent, the Hong Kong HSI up 0.46 percent, and the Shanghai Stock Exchange index up 0.04 percent.

The dollar’s exchange rate ‘licks’ its wounds

On the foreign exchange markets, the dollar’s exchange rate ‘licks’ its wounds from the previous day. The dollar index, which measures the performance of the US dollar against six major world currencies, has slightly recovered from yesterday’s lowest level in the last seven months of 102.15 points. It is currently up 0.12 percent, at 102.81 points.

At the same time, the dollar’s exchange rate strengthened against the yen by 0.73 percent, to 145.22 yen, after plunging 1.5 percent the day before, to 141.675 yen.

The US currency has reduced its losses against another safe currency in uncertain times – the Swiss franc, strengthening by 0.34 percent, so the franc is trading at 0.8552 francs, while against the euro it has hardly recorded any changes, with the euro standing at 1.095 dollars.

Last week’s weaker-than-expected US macroeconomic indicators, as well as disappointing earnings from some major technology companies and increased concerns about the situation in the Chinese economy, triggered global sell-offs of stocks and high-yield currencies.

Also, the yen’s exchange rate strengthened from its lowest level in 38 years against the dollar, which it reached in early July, by about 10 percent, thanks to the interest rate hike in Japan for the first time in 17 years, which reduced linked trading. On Monday, the global flight from risky assets began at a surprisingly rapid pace.

– The sell-offs manifesting as wild changes in the currency markets are sharp and fast, but usually very short-lived. The markets are clearly nervous about the different paths central banks are taking, leading to significant volatility – explains Jamie Cox, managing partner at Harris Financial Group.

Markets now expect the Fed to lower interest rates by 109 basis points by the end of the year, and they expect a half-percentage point cut as early as September.

– We maintain a certain degree of calm as we do not expect any excessive reaction from central bank leaders. We expect Fed Chairman Jerome Powell to provide clearer guidance at this year’s economic symposium in Jackson Hole later in August – said Christian Scherrmann, an economist at DWS.

On the oil markets, prices per barrel have risen, with Brent crude on the London market up 1.65 percent, at $77.56, and WTI on the US market up 1.86 percent, at $74.3.

Recovery of European markets after brutal correction

European stock markets began to recover on Tuesday after falling to their lowest level in five months the day before, thus following the recovery in Asian markets, and the recovery was also supported by good business results from several companies.

The pan-European STOXX 600 index was up 0.82 percent at around 9:30 AM, at 491 points, after plunging more than two percent yesterday. The tourism sector saw the highest increase, up 1.67 percent, and banking stocks also recovered.

At the same time, the London FTSE index rose 0.43 percent, to 8,043 points, the Frankfurt DAX rose 0.74 percent, to 17,467 points, and the Paris CAC rose 0.27 percent, to 7,167 points.

Global markets recorded a sharp price correction on Monday, driven by a disappointing July employment report in the US last Friday, which raised fears of a broader economic slowdown. However, on Tuesday, it seems that investors dismissed those concerns and stock markets are recovering.

Futures indices on Wall Street rose during overnight trading, and Asian markets also recorded gains. The Nikkei index on the Tokyo Stock Exchange jumped 10.23 percent, to 34,675 points, marking its best daily performance since October 2008, thus recovering yesterday’s loss of 12.4 percent.

On European markets, the rise in the tourism stock sector was driven by InterContinental Hotels’ stock, which jumped 2.1 percent after Holiday Inn reported an increase in business results in the first six months.

The largest individual stock was that of the Italian bank Monte dei Paschi di Siena, with a price jump of 8.2 percent after the bank raised its earnings forecast.

Fear of recession shakes Wall Street and lowers indices by 3 percent

On Wall Street on Monday, stock indices recorded the largest daily percentage drop since July 2022, plunging about three percent after the continuation of the wave of stock sales that began last week due to investor fears of a possible recession in the US economy, with the focus of sales on the ‘Magnificent Seven stocks’.

The Dow Jones index fell 1,033 points or 2.6 percent, to 38,703 points, the S&P 500 index fell three percent, to 5,186 points, and the Nasdaq index fell 3.43 percent, to 16,200 points.

All three indices recorded their largest daily percentage loss since July 2022, with the Nasdaq and S&P touching their lowest levels since May. The S&P 500 plunged four percent during yesterday’s trading, touching 5,119 points, before recovering some losses thanks to the announcement that activity in the US services sector recovered in July from its lowest level in the last four years due to an increase in orders and employment.

Last week’s data on the decline in activity in the US industrial sector in July to its lowest level in eight months, as well as a weak employment report showing that only 114,000 new jobs were created in the US economy that month compared to the forecast of 175,000, prompted investors to start thinking about a recession in the world’s largest economy, which led them to withdraw capital from stocks, especially technology stocks.

The focus of stock sell-offs was on the so-called Magnificent Seven stocks, which had previously lifted indices on Wall Street to record levels. The Nasdaq index already fell into correction territory on Friday, meaning it fell more than 10 percent from its record level.

Apple shares plunged 4.8 percent after Berkshire Hathaway investor Warren Buffett reduced its stake in the company. At the same time, Buffett raised the cash liquidity level in his investment fund to $277 billion. Prices of Nvidia, Microsoft, Alphabet, Meta, Tesla, and Amazon also fell, while the VIX index, a measure of fear on Wall Street, reached its highest level since late October 2020.

Traders attribute the sharp drop in stock prices partly to the halt of the so-called linked trading, during which investors borrow in countries with low interest rates like Japan and Switzerland to finance their investments in high-yield assets elsewhere in the world.

“Today’s sell-off is a continuation of the anxiety that was felt last week. It started with last week’s employment data, leading to a clear belief that the Fed needs to start acting more proactively,” said Neville Javeri, portfolio manager and head of the Empiric LT Equity team.