Swedish Consulate – On Tuesday Aug 6, Japanese stocks surged at the opening, boosting a recovery across struggling Asian markets, following reassuring statements from central bank officials that helped calm investor concerns. The Nikkei index jumped over 10% to exceed 34,500, rebounding significantly from its close of 31,458 on Monday. This followed a 12.4% drop in the previous session, marking its steepest decline since the 1987 Black Monday crash.
The MSCI index, which tracks Asia-Pacific shares outside Japan, increased by 2.0%. Meanwhile, Wall Street appeared more stable, with S&P 500 futures rising by 1.5%, Nasdaq futures up by 2%, and Euro Stoxx 50 futures advancing by 1.24%. On Monday, the S&P 500 had dropped by 3.00%, and the Nasdaq Composite had fallen by 3.43%, extending a recent decline as global markets reacted to fears of a potential U.S. recession.
Federal Reserve Reassures Markets as Treasury Yields Stabilize and Nikkei Rebounds
Yields on 10-year Treasury notes were back at 3.84%, after previously dropping to 3.667%. Federal Reserve officials, including San Francisco Fed President Mary Daly, sought to reassure markets, emphasizing the importance of avoiding a downturn in the labor market. Daly indicated that she was open to the possibility of interest rate cuts if needed and stressed the need for proactive policy.
“Japanese Stocks Nikkei is seeing a notable rebound from Monday’s sharp decline, as remarks from Fed’s Daly and a stronger-than-expected ISM services report have eased concerns about a potential emergency Fed rate cut next week,” commented Matt Simpson, a senior market analyst at City Index in Brisbane.
“However, this isn’t a full-fledged risk-on rally yet. It’s unclear if this is merely a temporary reprieve or if further declines are on the horizon.”
Currency Markets Stabilize as Yen and Dollar Adjust, While U.S. Economic Data Offers Mixed Signals
Currencies also seemed to reverse some of the sharp movements from Monday, with the dollar rising to 145.64 yen after falling 1.5% the previous day to as low as 141.675. The yen had surged recently as investors exited carry trades, where they borrowed yen at low rates to invest in higher-yielding assets.
The dollar also reduced its losses against the Swiss franc, stabilizing at 0.8546 francs after dipping to 0.8430. Treasury yields had recovered somewhat, partly due to a rebound in the U.S. ISM services index, which rose to 51.4 in July. The employment index also increased by 5 points to 51.1, suggesting last week’s payrolls report might have overstated the labor market’s weakness.
“Bouncing back from such historic sell-offs is challenging, and investors are likely to remain cautious before reinvesting in equity markets,” noted Boris Kovacevic, a global macro strategist at payments firm Convera based in Austria.
“Nevertheless, the dollar-yen pair has fallen 12% since its peak five weeks ago and is now in oversold territory. The yen could be sensitive to any positive surprises in U.S. economic data, which might lead investors to reconsider the recession trade and help stabilize Japanese equities.”
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Fed Rate Cut Expectations Steady as Gold Falls and Oil Prices Rise Amid Geopolitical Tensions
Market expectations for a 50 basis point rate cut by the Fed at its September meeting remain unchanged, with futures indicating a 71% chance of such a move. The market has priced in around 100 basis points of easing for this year and a similar amount for 2025.
In the precious metals market, gold did not receive a safe-haven boost as investors appeared to be taking profits to offset losses elsewhere. Spot gold was priced at $2,409 per ounce after a 1.52% drop overnight.
In energy markets, oil prices saw an early bounce on Tuesday following reports of injuries to U.S. personnel in an attack on a military base in Iraq, raising concerns of a broader conflict. U.S. West Texas Intermediate crude futures climbed by $1.18, or 1.6%, to $74.12 per barrel.
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