JPMorgan warns of spillovers from Japan market rout, says recovery uncertain

Investing.com-- JP Morgan analysts warned that a recent slump in Japanese markets threatened to spill over into Asian and broader markets, and expressed uncertainty over any near-term recovery. 

JPM said that Japan’s record correction- where the Nikkei 225 slumped around 13% on Monday- had spurred a sense of panic in markets, and had also dented sentiment towards global equity markets.

This dour sentiment raised the prospect of “unexpected ruptures in markets,” and also questioned any near-term recovery. 

“We worry that such rapid market declines often lead to unexpected ruptures in markets (from spillovers in cross-asset, volatility, dispersion and private markets, to at least margin calls), and any bounce here may not sustain far until we arrive at a new market-structure equilibrium and get past some geopolitical risks in the Middle East,” JPM analysts wrote in a note.

A mix of profit-taking, an unwinding carry trade, heightened fears of a U.S. recession and hawkish messages from the Bank of Japan battered Japanese equities earlier this week, putting the Nikkei 225 in bear market territory and also wiping out all gains in Japanese markets this year.

But the Nikkei staged a stellar recovery on Tuesday and Wednesday, recouping all of Monday’s losses after some BOJ officials downplayed the bank’s plans to hike interest rates. 

Broader Asian markets had also clocked steep losses this week, but did not recover as rapidly as Japan. Sentiment also remained under pressure from concerns over heightened tensions in the Middle East, after the alleged Israeli killing of a Hamas leader in Iran. 

But JPM analysts noted that U.S. interest rates were likely to spur some strength in Asian markets in the coming months. The brokerage expects the Fed to enact two 50 basis point cuts in September and November.