Two speed recovery
The start of this week brought with it a catastrophic breakdown in risk sentiment. A global spillover was triggered by a disastrous overnight trading session in Asia as local equity markets reacted to the risk adjustment that had taken place during Friday’s European and US trading sessions. Whilst widespread regional weakness played its part in sparking the global sell-off, it was open and vulnerable Japanese asset markets that became the epicentre of risk. Many of the headlines that we have brought you have therefore referred to Japanese equity, bond and currency market moves in relation to the rest of the world.
Now that risk sentiment has broadly stabilised, it is appropriate to look towards the region once again. The rebound in valuations amongst Japanese stocks has been far more convincing than those observed across other markets. Valuations in Japan’s Nikkei 225 still remain subdued versus those observed in recent months. Indeed, almost all of the gains made in the headline index and wider stock market so far this year have been eradicated thanks to the risk adjustment in August. However, since Monday’s sell off, the index stands more than 10% higher versus the low recorded earlier this week.
That recovery is far greater than that we have seen in most western equity markets that still bear noticeable scars from this week’s price action. Based upon the source of the original uncertainty (the US labour market), it seems likely US and European markets are waiting for the latest US CPI publication due on Wednesday before any significant further repricing. The adjustments that have endured within fixed income and rates are more likely to drive price action now that equity market volatility is residing. Those rate adjustments remain consistent with a weaker Dollar.
Discussion and Analysis by Charles Porter
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