Global Markets Rebound After Historic Collapse but Will It Last?
Equity markets around the World rebounded after Monday's historic collapse. But will this positive trend last? l Credit: Spencer Platt/Getty Images
- Nikkei recovered part of the huge losses it faced on Monday.
- Equities and crypto rebounded after a historic collapse.
- But will this positive trend last?
The Bank of Japan’s unexpected rate hike, coupled with escalating geopolitical tensions and a worsening U.S. economy, ignited chaos in global financial markets, leading to one of the most tumultuous 48-hours seen in decades.
On Monday, Aug. 5, markets plunged dramatically, fueled by a wave of risk aversion and widespread selling across asset classes. However, the bloodbath appeared short-lived as the market charted a course to full recovery on Tuesday.
With the storm passing and markets beginning to stabilize, the question remains: will it last?
Markets Recover From Heavy Losses
On Tuesday, Aug. 6, Japanese shares quickly recovered from Monday’s steep decline, which had weighed on all global financial markets.
At press time, the Nikkei 225 stock index had surged by 10%, or 3,217 points, marking its largest one-day rally in points after a drop of over 12% the previous day.
The Monday sell-off in Tokyo followed the Bank of Japan’s second rate hike in 17 years, which caused the yen to soar against the dollar, making Japanese stocks and exports more expensive for foreign investors and buyers. The index is now well on its way to making a full recovery.
In line with the Asian market recovery, European stocks also showed moderate gains. At the time of writing, London’s FTSE 100 was up by 0.3%, Paris’ CAC 40 increased by 0.2%, Milan’s FTSE Mib rose by 0.4%, and Frankfurt’s DAX 40 gained 0.7%.
Across the ocean, in the U.S., pre-market indicators showed the DOW expected to rise by 0.6%, the NASDAQ by 1.4%, and the S&P 500 by 1.1%.
The global cryptocurrency market cap also staged a remarkable recovery, reaching $1.98 trillion, an 8.9% increase over the last day. Bitcoin rose by 6.7% to $55,684.65, and Ethereum increased by 7.8% to $2,504.47.
The Role Of The VIX
According to business data provider FactSet, VIX surged above 50 on Monday morning, reaching its highest level since an intraday peak of 57.24 on April 2, 2020, shortly after the Federal Reserve’s emergency actions during the COVID-19 pandemic.
Although officially known as the CBOE Volatility Index (VIX), it is often referred to by its unofficial nickname, the Wall Street Fear Index.
VIX is derived from the market prices of options on the S&P 500 and measures expectations of future and implied volatility. Higher VIX readings indicate greater market uncertainty, while lower readings suggest calmer market conditions.
On Monday, VIX spiked dramatically to above 50, up from 23 on Aug. 2. The index hadn’t reached such levels since November 2020.
Since the initial COVID-related market sell-off, the VIX has generally remained subdued, often trading below 20. While spikes in the VIX often coincide with significant market sell-offs, they can also be brief and precede a rebound in stock prices.
What To Expect Now?
First a drop, now a bounce. So, what to expect now?
Chris Beauchamp, chief market analyst at global investment firm IG, said, “Yesterday’s slump certainly seemed like an overreaction, particularly in Japanese markets. The VIX’s huge one-day spike was on a par with 2008 and 2020, but those were global crises, whereas Monday was the unwinding of the yen carry trade and a growth panic in U.S. markets.”
“The Fed has been right to avoid any silly talk of an emergency rate cut, and the sell-off in tech stocks has helped to trim some of the exuberance that we saw back in June and early July,” Beauchamp added.
Beauchamp noted that stocks often struggle during August and September, so additional mild declines would align with typical market patterns. However, he cautioned that yesterday’s drop could also signal a temporary reset.
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