(Bloomberg) — Japanese equities powered higher from the open, retracing some of the losses sustained in Monday’s global rout, which wiped out billions across markets from New York to London. US equity futures also advanced in early Asia trading and Treasuries fell.
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The Nikkei 225 Stock Average jumped as much as 8.3% after tumbling 12.4% the day before. Shares in Australia were little changed, while futures in Hong Kong pointed to gains. The initial positive signs Tuesday suggest markets may be able to catch their breath following a dramatic day in which Wall Street’s “fear gauge” – the VIX – at one point registered a record increase in data going back to 1990.
The Nikkei 25 futures circuit breaker was triggered before the market opened after having suffered its biggest one-day slump in yen terms Monday. The yen weakened more than 1% versus the dollar after surging over 3% Monday.
“This level of implied volatility almost guarantees fireworks in the price action,” Chris Weston, head of research at Pepperstone Group Ltd. in Melbourne, wrote in a research note. “I prefer to buy a potential rip after the dip, in the ‘hope’ that the move can be sustained.”
While the S&P 500 pared some of its losses to finish 3% lower Monday, it still suffered the biggest slide in about two years amid strong trading volume. The tech-heavy Nasdaq 100 saw its worst start to a month since 2008. Still, futures show both those indexes may gain when US trading begins later Tuesday.
Speculation about a looming US recession — mostly seen as premature — wiped out a celebratory mood driven by recent signals from the Federal Reserve about the timing of its first rate cut. The repricing was so sharp that the swap market earlier assigned a 60% chance of an emergency rate reduction by the Fed over the coming week. Those odds subsequently ebbed.
Treasuries lost some steam after a surge that briefly drove two-year yields — which are sensitive to monetary policy — below those on 10-year bonds. US 10-year yields rose five basis points to 3.84% on Tuesday. A gauge of perceived risk in the US corporate credit markets soared, with the turmoil effectively shutting down bond sales on what had been expected to be among the busiest days of the year. Bitcoin sank about 10%.
In Asia, the wave of selling that hit a fever pitch in Japan may subside. On Monday, investors rushed to unwind popular carry trades, powering a 2% jump in the yen and causing the Topix stock index to shed 12% and close the day with the biggest three-day drop in data stretching back to 1959. The rout wiped out $15 billion of SoftBank Group Corp.’s value on Monday.
The US stock plunge is vindicating some prominent bears, who are doubling down with warnings about risks from an economic slowdown. JPMorgan Chase & Co.’s Mislav Matejka said equities are set to stay under pressure from weaker business activity, a drop in bond yields and a deteriorating earnings outlook. Morgan Stanley’s Michael Wilson warned of “unfavorable” risk-reward.
“This doesn’t look like a ‘recovery’ backdrop that was hoped for,” Matejka wrote. “We stay cautious on equities, expecting the phase of ‘bad is bad’ to arrive,” he added.
Market veteran Ed Yardeni said that the current equity selloff bears some similarity to the 1987 crash, when the economy averted a downturn despite investor fears at the time.
“This is very reminiscent, so far, of 1987,” Yardeni said on Bloomberg Television. “We had a crash in the stock market — that basically all occurred in one day — and the implication was that we were in, or about to fall into, recession. And that didn’t happen at all. It had really more to do with the internals of the market.”
After a very strong first half, the market had become extended on a short-term basis and the bar for positive surprises too high — and a little bit of bad news has gone a long way, according to Keith Lerner at Truist Advisory Services.
“From a stock market perspective, our base case has not changed,” Lerner said. “Our work still suggests the bull market deserves the benefit of the doubt. However, we have been expecting a choppier environment into the back half of July and August given the sharp rebound from April, stretched sentiment, and the fact that we’re entering a seasonally weaker period of the calendar year.”
Moreover, after strong first halves, historically we have seen a typical pullback of 9% at some point, even while markets still tended to end higher by the end of the year.
Elsewhere in the Asian region, Australia’s central bank on Tuesday is expected to hold its cash rate at 4.35% for a sixth straight meeting, economists predict. The nation is poised to stay near the back of the global easing cycle as local inflation — while cooling — remains elevated requiring the Reserve Bank to keep its key interest rate at a 12-year high.
Oil rose from a seven-month low early Tuesday as the halting of production from Libya’s biggest field refocused attention on the Middle East.
Corporate Highlights:
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Palantir Technologies Inc. raised its annual outlook, citing continuing demand for its artificial-intelligence software.
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A federal judge on Monday ruled that Google has illegally monopolized the search market, hading the government an epic win in its first major antitrust case against a tech giant in more than two decades.
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Nvidia Corp.’s upcoming artificial intelligence chips will be delayed due to design flaws, The Information reported, citing two unidentified people who help produce the chip and its server hardware.
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Dell Technologies Inc. is cutting jobs as part of a reorganization of its sales teams that includes a new group focused on artificial intelligence products and services.
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Tyson Foods Inc. shares surged, bucking a broad retreat in equity markets, as quarterly earnings beat the highest of analyst estimates on a rebound in chicken profits.
Key events this week:
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Australia rate decision, Tuesday
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Eurozone retail sales, Tuesday
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China trade, forex reserves, Wednesday
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US consumer credit, Wednesday
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Germany industrial production, Thursday
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US initial jobless claims, Thursday
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Fed’s Thomas Barkin speaks, Thursday
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China PPI, CPI, Friday
Some of the main moves in markets:
Stocks
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S&P 500 futures rose 1% as of 9:03 a.m. Tokyo time
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Hang Seng futures rose 0.2%
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Japan’s Topix rose 3.9%
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Australia’s S&P/ASX 200 was little changed
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Euro Stoxx 50 futures fell 1.5%
Currencies
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The Bloomberg Dollar Spot Index was little changed
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The euro was little changed at $1.0951
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The Japanese yen fell 1.2% to 145.88 per dollar
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The offshore yuan fell 0.2% to 7.1497 per dollar
Cryptocurrencies
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Bitcoin fell 0.4% to $54,183.1
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Ether fell 0.5% to $2,425.64
Bonds
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The yield on 10-year Treasuries advanced five basis points to 3.84%
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Japan’s 10-year yield declined 21 basis points to 0.750%
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Australia’s 10-year yield declined seven basis points to 3.99%
Commodities
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West Texas Intermediate crude rose 1.7% to $74.16 a barrel
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Spot gold fell 0.1% to $2,407.23 an ounce
This story was produced with the assistance of Bloomberg Automation.
–With assistance from Rita Nazareth and Winnie Hsu.
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