A recent spike in the yen’s value alarmed investors. Still, shares recovered when the deputy governor of the Bank of Japan stated that interest rates wouldn’t be raised if markets remained uncertain.
After a yen decline of more than 2% vs the dollar, Japanese stocks increased. In response to the recent volatility in the Japanese markets, BOJ Deputy Governor Shinichi Uchida stated that the BOJ’s rate path will change if it affects the policy outlook. Futures for the US dollar increased, and stocks in Taiwan and South Korea continued to rise.
In an uncertain moment for investors, Uchida’s remarks provided much-needed comfort to the markets by alleviating concerns about whether the recent unwinding of the yen carry trade had reached its end. As traders continued to evaluate whether the recent global selloff was an overreaction to bad US economic data, the BOJ’s softening stance also helped to eliminate one significant question.
“We wouldn’t say that markets will regain stability overnight, but investors appear to be taking the view that a large part of the selloff was technically driven and unlikely to persist,” said Homin Lee, senior macro strategist at Lombard Odier Singapore Ltd. “For markets like South Korea and Taiwan that are supported by decent fundamentals, we think there is scope for more recovery from this week’s selloff.”
The Asia-wide index increased by 1.6%. After losing four straight days, Chinese stocks saw a small increase in response to a mixed bag of trade statistics.
After a 20% decline from their July highs, the Nikkei and Topix indices entered a bear market on Monday. At the beginning of the week, the Nikkei’s implied volatility reached its highest point since 2008.
“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.”
According to Arindam Sandilya, co-head of global FX strategy, the unwinding of the yen carry trade among speculative investors was between 50% and 60% complete on Bloomberg TV. The yen’s 11% increase over the previous month caught investors off guard who were utilizing the cheap currency to finance investments in higher-yielding assets.
Another carry trade target, the Mexican peso, increased by more than 1% vs the US dollar on Wednesday. Both the Australian and New Zealand dollars experienced growth.
Tuesday saw a 1% increase in the S&P 500 and Nasdaq 100 following a recovery in Asia led by Japan following a global collapse. The VIX, a Wall Street “fear gauge,” experienced its largest decline since 2010. Additionally, traders reduced their forecasts for this year’s Federal Reserve rate cuts; swaps now indicate to 105 basis points of easing, down from as high as 150 basis points on Monday.
After rising 10 basis points to 3.89% on Tuesday, Treasury 10-year rates increased by two basis points during Asian trading. Oil had no depth.
“We would characterize 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 quite normal, especially during August, which historically is a volatile time for markets given lighter trading volumes and the summer doldrums.”
After a decline driven by bleak economic data, disappointing tech results, stretched positioning, and unfavourable seasonal trends, some degree of calmness was restored to the markets on Tuesday. With the S&P 500 down roughly 8.5% from the highs, the market’s wall of fear over the last several days propelled the index to the verge of a correction.
