European stock markets experienced instability on Tuesday, even as Japan’s Nikkei 225 staged a dramatic recovery from record lows. London’s FTSE 100, along with markets in Paris and Frankfurt, initially opened higher but quickly reversed gains.
The Nikkei 225 surged by 10.23% or 3,217 points, marking its most significant single-day increase in points. This rebound came after a severe drop earlier in the week that had sent shockwaves through global financial markets.
The previous plunge in the Nikkei, which saw a 12% decline, significantly impacted global stock markets, leading to sharp declines in the UK, Europe, and the US. Analysts attribute the volatility to fears of a US economic slowdown and a rare interest rate cut by the Bank of Japan, which contributed to market uncertainties.
On Tuesday, the FTSE 100 managed a modest gain of 0.33% at the open but quickly fell back into negative territory. French and German stock markets followed a similar trajectory. Russ Mould, investment director at AJ Bell, noted that while there might be “some relief” in the markets, the real test will come with the US stock market opening later in the day.
US stock markets have faced recent turmoil following disappointing employment figures for July, which revealed a rise in the jobless rate. Additionally, concerns have grown over the overvaluation of shares in major technology companies, particularly those investing heavily in artificial intelligence (AI). The technology-heavy Nasdaq index has seen sharp declines, although it trimmed losses to end 3.4% lower on Monday. The S&P 500 and the Dow Jones Industrial Average also suffered losses, falling 3% and 2.6%, respectively.
The weak jobs data has fueled speculation about the timing and extent of potential interest rate cuts by the US Federal Reserve. Last week, the Fed chose to hold rates steady, diverging from other central banks that opted for cuts. Economist Mohamed El-Erian criticized the Fed’s decision, suggesting it missed an opportunity to cut rates, which could increase the risk of a recession. He warned that a US downturn would have global repercussions, emphasizing that “what happens in the US economically and financially does not stay in the US.”
The uncertainty surrounding the Fed’s next moves is likely to keep markets volatile. Stefan Angrick, a senior economist with Moody’s Analytics, predicted continued market swings until the Fed’s September meeting.
Meanwhile, Japan’s stock market has experienced significant volatility following the Bank of Japan’s decision to raise interest rates for the second time in 17 years. This move strengthened the yen but made Japanese stocks and exports more expensive. Despite these challenges, Jesper Koll of Monex Group Japan expressed confidence in Japan’s economic fundamentals, noting strong corporate capital returns.
In addition to Japan, stock markets in South Korea and Taiwan also saw gains, recovering around 3.5% after recent declines.
