Stock markets cautiously recover after manic sell-off on Monday

Global stock markets partially recovered from yesterday’s losses this morning as investors assumed the sell-off was overdone.

Japan’s Nikkei 225 was up more than 10 percent at 9.30am UK time, after falling 12.5 percent in the previous session as the so-called yen carry trade unwound the index.

The FTSE 100 And FTSE 250 rose at the opening but then fell back to a stable level after British stock markets fell by more than 2 percent on Monday. European stock indices also regained some ground.

Japan’s stock market suffered its biggest one-day drop in more than 30 years on Monday, amid fears of a looming U.S. recession coupled with the continued unwinding of the yen carry trade after the Bank of Japan raised interest rates last week.

Carry trading has been popular among investors for about twenty years. It is a strategy in which traders profit from the difference between Japanese and other global interest rates.

However, Richard Hunter, head of markets at Interactive Investor, said the tapering may have had “less impact than first thought” and that “little has really changed” for the Japanese economy and its prospects.

Markets continued to fall in the U.S. as recession fears and the lack of a Fed rate cut spooked investors. The tech-heavy Nasdaq closed down 3.4 percent, while the Dow and S&P 500 fell 2.6 percent and 3 percent, respectively.

This followed disappointing employment figures, which raised concerns that the Federal Reserve was too slow to cut interest rates and that the world’s largest economy now faces a looming recession.

Later in the day on Monday, however, separate data showed the U.S. services sector rebounded from a four-year low in July, limiting market losses.

Fed policymakers also made comments in an attempt to calm market nerves.

While there are now calls for an emergency rate cut in the US, current market prices suggest the Fed will wait until its September meeting before easing monetary policy.

Central bank policy mistakes pose “the most significant downside macroeconomic risk” for major economies this year, according to Kallum Pickering, chief economist at Peel Hunt.

He added: ‘While we still expect a soft landing in the US, we have lowered our expectations for near-term real GDP and raised our expectations for the size and pace of the Fed’s upcoming cuts.

‘Some reliable signals of a US recession, including the yield curve inversion, have been flashing red for months.

‘So far, however, economic activity in the US remains extremely strong.

‘A key reason for the US strength and positive surprises is that domestic activity has benefited from a massive fiscal stimulus.

‘As this support is likely to persist for a long time, it could help limit downside risks as US economic activity slows in the near term.’