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The global market rally gained momentum on Wednesday, with European equities experiencing significant surges following strong overnight gains in Japanese stocks.
In the UK, the FTSE 100 rose by 1.8 percent to reach 8,166.88, while the FTSE 250 saw a 1.0 percent increase, trading at 20,576.03. Meanwhile, the CAC in Paris climbed 2.0 percent, and the DAX in Frankfurt advanced by 1.4 percent.
The rally in European markets was driven primarily by housebuilders and banks, with two-thirds of the midcap index stocks finishing in positive territory.
This European upswing followed a robust rebound in Japan, which had been the hardest-hit market during Monday’s significant sell-off. The Nikkei 225 closed 1.2 percent higher, and the broader Topix index rose by 2.3 percent, leaving Japanese equities flat for the week.
Japan’s rally was largely attributed to comments from the Bank of Japan’s Deputy Governor, Shinichi Uchida, who hinted at a pause in further rate hikes due to ongoing market volatility. His remarks caused the yen to drop by more than two percent against the dollar, reversing some of the appreciation triggered by the previous week’s interest rate increase.
The yen’s strength has been a major factor in market instability, as it impacts the yen carry trade—a strategy where investors borrow in yen to invest in higher-yielding assets elsewhere. The weakening of the yen has made this trade less profitable, contributing to market uncertainty, especially after last week’s disappointing US economic data.
US markets also opened in the green, with the S&P 500 rising by 1.3 percent and the Nasdaq, which is heavily weighted toward technology, jumping by 1.4 percent.
However, some analysts remain cautious about the sustainability of the rally. David Morrison, senior market analyst at Trade Nation, expressed concerns, noting that while the rally was an “encouraging start,” traders might be looking for opportunities to sell given the sharp rebound. He emphasized that markets rarely move in a straight line.
Looking forward, Derren Nathan, head of equity research at Hargreaves Lansdown, warned that more volatility could be on the horizon, especially given the size of the positions in the carry trade.
Thomas Mathews, head of Asia-Pacific markets at Capital Economics, suggested that the yen might rise further in the coming months, potentially making the carry trade even less attractive. He noted that while markets had largely factored in further rate hikes from the Bank of Japan, the next major rally might require “concrete news” of a US recession or a significant economic slowdown.
Mohit Kumar, an analyst at Jefferies, acknowledged that markets may have “overreacted” to the recent US data but cautioned that there could still be risks ahead, particularly if the unwind of the carry trade is not yet complete. He indicated that this could lead to further market volatility.
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