Hang Seng Index, Nikkei 225, ASX 200: Yen Fuels Post-Crash Nikkei Rebound

US Equity Markets Join Broad-Based Sell-Off

On Monday, August 5, the US equity markets experienced another session of heavy losses. The Nasdaq Composite Index tumbled 3.43%, while the Dow and the S&P 500 slid by 2.69% and 3.00%, respectively.

US ISM Services PMI Calms Recession Fears

The ISM Services PMI increased from 48.8 in June to 51.4 in July, easing fears of a US recession. Significantly, the ISM Employment Index jumped from 46.1 in June to 51.1 in July, signaling a robust labor market, contrasting with the US Jobs Report.

Expert Commentary

Arch Capital Global Chief Economist Parker Ross commented on the ISM Services PMI, saying,

“We need some positive news on the economy – the labor market in particular – in order to change the narrative and get cooler heads to prevail. To that point, this morning’s ISM & S&P Global Services PMIs beating expectations was certainly a good first step, but there aren’t many other data releases this week to counter current sentiment on the labor market other than the jobless claims data on Thursday morning.”

Japanese Household Spending

Japanese household spending increased by 0.1% in June after a 0.3% decline in May.

The uptick in household spending could support investor bets on a Q4 2024 BoJ rate hike. However, despite rising wages, household spending remained lackluster.

Japan Wage Growth Accelerates

Average cash earnings grew by 4.5% year-on-year in June, up from 2.0% in May. A jump in wages could raise disposable income. Higher disposable income may fuel household spending and demand-driven inflation. A higher inflation outlook could signal a more hawkish BoJ rate path, driving Yen demand.

A stronger Yen could force more carry trade unwinds, impacting the Nikkei Index and broader Asian markets.

Impact of BoJ Policy on the Nikkei

On July 31, the Bank of Japan cut Japanese Government Bond (JGB) purchases and unexpectedly raised interest rates. The tighter monetary policy stance drove Yen demand, likely leading to margin calls, forcing investors to unwind their carry trade positions.

The carry trades involved borrowing Yen in a low-interest-rate environment to invest in riskier assets and instruments in higher-interest-rate environments. Margin calls would force investors to exit riskier assets, including the Nikkei, and other positions to repay their Yen loans.

Unwinding positions in higher-interest-rate environments, such as the US, and conversion to the Yen would strengthen the Yen further and cause more margin calls, amplifying the impact on the global financial markets.

On Monday, the USD/JPY tumbled to a morning low of 141.684. July’s US Job Report fueled fears of a US recession, raising bets on multiple 2024 Fed rate cuts.

Interest rate differentials between the Japanese Yen and the US dollar narrowed, contributing to the USD/JPY and Nikkei Index’s losses. A stronger Yen can affect  corporate earnings from overseas and net profits.

Expert Views on the Market Turmoil

Natixis Asia Pacific Chief Economist Alicia Garcia Herrero commented on the Monday sell-off, stating,

“Markets have plummeted today in Japan: US growth scare (or fear of hard landing) has brought the Nikkei down by 12.4% with a much stronger yen (142) and plummeting JGB yields (0.76%). Suddenly, BoJ needs to deal with the opposite problem that it had just a couple of days before hiking rates for the second time on July 31!”

Hang Seng and Mainland China Markets Rise

Meanwhile, the Hang Seng Index gained 0.17% on Tuesday morning, with tech stocks contributing.

The Hang Seng Tech (HSTECH) Index advanced by 0.10%, with Alibaba (9988) rallying 2.09%.

Mainland China’s equity markets trended higher on expectations of a pickup in economic activity. The CSI 300 and the Shenzhen Composite Index saw gains of 0.51% and 1.17%, respectively.

Nikkei Index Rebounds on Yen Pullback

The Nikkei Index rallied 10.91% on Tuesday morning, reversing its losses from Monday. A weaker Yen drove buyer demand for Nikkei-listed stocks. The USD/JPY rose to a morning high of 146.364.

Tokyo Electron Ltd. (8035) surged by 17.46%, while Softbank Group Corp. (9984) and Sony Corp. (6758) rallied 9.75% and 8.42%, respectively.

ASX 200 Gains on Nasdaq Futures Gains

The ASX 200 Index advanced by 0.18% on Tuesday morning, tracking the US futures. The Dow Jones mini was up 327 points. However, Gold, oil, and tech stocks limited the gains. The S&P ASX All Technology Index (XTX) fell by 0.24%.

Woodside Energy Group Ltd (WDS) tumbled by 4.59%, while gold-related stock Evolution Mining Ltd. declined by 1.40%.

Investors were cautious ahead of the RBA interest rate decision. An unexpected RBA rate hike to tame sticky inflation could spook investors.

Investors should remain alert amidst economic growth fears and shifting monetary policy bets. Closely monitor the news wires, real-time data, and expert commentary to manage trading strategies accordingly. Stay informed with our latest news and analysis to manage positions across the Asian equity markets.