Stock markets cautiously regain ground after Monday’s frenetic sell-off

Global stock markets partially recovered this morning from losses suffered yesterday as investors bet the sell-off was overdone.

Japan’s Nikkei 225 was up more than 10 percent at 9.30am UK time, having lost 12.5 percent in the previous session as the unravelling of the yen’s so-called carry trade wreaked havoc on the index.

The FTSE 100 and FTSE 250 opened with gains before retreating to flat, after UK stock markets fell more than 2 percent on Monday, while European stock indexes also regained some ground.

Japan’s stock market suffered its biggest one-day drop in more than 30 years on Monday as fears of an impending U.S. recession combined with ongoing unwinding of the yen carry trade after the Bank of Japan raised interest rates last week.

Popular among investors for about two decades, the carry trade is a strategy whereby traders profit from the difference between Japanese interest rates and other global interest rates.

But Interactive Investor’s director of markets Richard Hunter said deregulation may have “had less of an impact than initially thought”, noting that “little has actually changed” for the Japanese economy and its outlook.

Markets continued to fall in the United States, after fears of a recession and the lack of a rate cut by the Federal Reserve spooked investors. The Nasdaq, with a strong presence of technology companies, closed down 3.4%, while the Dow and the S&P 500 fell 2.6% and 3%, respectively.

This followed weaker-than-expected jobs data, which raised fears that the Federal Reserve has been too slow to cut interest rates and the world’s largest economy now faces a looming recession.

But separate data released later on Monday showed the US services sector rebounded from its four-year lows in July, limiting market losses.

Federal Reserve officials also issued comments in an attempt to calm market jitters.

While there are now calls for an emergency interest rate cut in the US, current market pricing suggests the Fed will wait until its September meeting before pulling the trigger on monetary policy easing.

Kallum Pickering, chief economist at Peel Hunt, said central bank policy mistakes have been “the main macroeconomic downside risk” to major economies this year.

He added: “While we continue to expect a soft landing in the United States, we have lowered our near-term real GDP estimates and raised our expectations for the scale and pace of the Fed’s next cuts.

‘Some reliable signs of a US recession, including an inverted yield curve, have been flashing red for months.

‘However, so far US economic activity has remained ultra-strong.

‘One of the main reasons for the US strength and the upside surprises is that domestic activity has benefited from massive fiscal stimulus.

‘As this support is likely to continue in the future, it may help contain downside risks as US economic activity weakens in the near term.’