Asian stock markets rebound from rout as Fed set to cut rates sooner than expected

HONG KONG –

Asian stocks advanced on Tuesday after the previous day’s global rout, fuelled by fears of a U.S. recession, led to calls for the Federal Reserve to cut interest rates before its next meeting.

Tokyo, which suffered a record loss on Monday, jumped more than 10% at one point as traders rushed to scoop up struggling stocks caught in a disastrous day for markets that saw shares in the red.

Analysts have warned that there is likely to be more volatility ahead.

The decline came after data released Friday showed a surprisingly low number of U.S. jobs added last month and another report showing continued weakness in manufacturing.

That led to warnings that the Fed had kept rates at levels as high as they have been for more than two decades for too long and risked tipping the economy into recession.

Some analysts have referred to the “Sahm rule,” which states that an economy enters the early stages of recession if the three-month moving average of unemployment is 0.5 percentage points above its lowest level in the previous 12 months. That rule was triggered by Friday’s data.

While all three major Wall Street indices had another tough day (with the Nasdaq down more than 3%), better-than-expected results in the key U.S. services sector brought some comfort to investors.

Tokyo’s Nikkei, which fell more than 12% on Monday and suffered a record point loss, jumped about 10.5% in the morning before paring some of those gains.

Toyota gained more than 10%, Sony gained more than 7%, while chip giant Tokyo Electron added 12.26%.

“This is a broad-based, widespread gain,” Nomura analysts said, adding that investors will also pay close attention to the foreign exchange market.

Nomura expects the Nikkei to end with its biggest gain ever, surpassing the 2,676.55 points in October 1990.

“If the movements continue as they started, the Nikkei ended yesterday with the biggest loss and will end today with the biggest gain in points,” he said.

Hong Kong, Shanghai, Sydney, Seoul, Taipei and Manila also gained, but Singapore and Wellington suffered more sales.

Friday’s data prompted calls for the Fed to cut rates now to support the economy, with Nobel Prize-winning US economist Paul Krugman writing on social media: “I wasn’t calling for a rate cut between meetings because that might signal panic.

“But since we may be seeing a panic anyway, that argument loses its force. It is a real argument for an emergency reduction soon.”

But Chicago Fed chief Austan Goolsbee urged caution and not read too much into any one jobs report.

“As you see the jobs numbers are weaker than expected but don’t look like a recession yet, I think you have to be forward-thinking about where the economy is going,” he told CNBC ahead of Monday’s U.S. trading day.

“The number of jobs being created is plus or minus 100,000 a month, so you have to be a little bit careful about drawing excessive conclusions about things that are within the margin of error,” he said, adding that if the U.S. economy deteriorated, the Fed “would fix it.”

Pantheon Macroeconomics wrote in a note to clients that the Fed “is likely to give little weight to the decline in stock prices, as major indices are still higher than at the start of the year.”

Fed Chairman Jerome Powell said after the bank’s policy meeting last week that a taper could come as early as September.

While bets had been on a 25 basis point cut — with at least one more before January — they have increased sharply and investors are now targeting cuts of at least 100 basis points by the end of the year.

In currency markets, the yen’s rally has run out of steam and is sitting just below 145 per dollar, after hitting a six-month high of around 142 on Monday.

The Japanese currency has surged over the past month – after hitting its lowest level in nearly four decades in early July – after the Bank of Japan raised interest rates on the same day Powell signaled the Fed planned to ease policy.

But analysts at Moody’s Analytics write: “The Asian stock market plunge will cause sleepless nights at the Bank of Japan. Over the past two years, the central bank has played it safe, fearing it would repeat the mistake of tightening policy in the midst of a crisis.”

“The last significant rate hikes by the BoJ came in 2006, just before the collapse of Lehman Brothers, and in 2000, just as the dot-com bubble burst. Each time, the BoJ was forced to change course.

“The BoJ can hardly be blamed for this latest market slide, so another turnaround is not a foregone conclusion. But this slide does not make last week’s rate hike, which was already on shaky ground, any better.”