European stock markets remained unsettled on Tuesday despite a notable recovery in Japan that nearly reversed earlier record declines.
London’s FTSE 100, along with indices in Paris and Frankfurt, initially rose but soon fell back.
Japan’s Nikkei 225 index surged by 10.23%, or 3,217 points, in its largest single-day point gain following a sharp drop the previous day.
Attention has now shifted to US stock markets, which are set to open in a few hours after several days of turbulent trading.
The Nikkei’s 12% decline earlier in the week had a negative impact on global markets, leading to significant share price drops in the UK, Europe, and the US.
Analysts attribute these movements to concerns about a potential US economic slowdown, with Japan’s rare interest rate cut also contributing to the volatility.
On Tuesday, the FTSE 100 saw a slight initial increase of 0.33% before slipping, with French and German markets following a similar trend.
Russ Mould, investment director at AJ Bell, noted that while there may be some relief in stock markets on Tuesday, the real test will be the US market’s performance when it opens later in the day.
“Fears about a sharp recession in the US, engendered by weak jobs data, remain,” he added.
US stock markets have declined following July’s disappointing employment report, which revealed an increase in the unemployment rate.
Concerns have also emerged that shares in major technology firms, especially those heavily invested in artificial intelligence (AI), may be overvalued and facing challenges.
The technology-focused Nasdaq index has experienced significant drops recently, although it managed to reduce its losses to end 3.4% lower on Monday.
The S&P 500 fell by 3%, while the Dow Jones Industrial Average closed 2.6% down.
The weaker-than-expected job data has fueled speculation regarding the timing and extent of potential interest rate cuts by the US Federal Reserve.
Last week, the Fed decided to maintain current interest rates, unlike other central banks that opted to reduce theirs.
“The Federal Reserve missed an important opportunity to cut interest rates last week like the Bank of England did,” said economist Mohamed El-Erian, who is also president of Queens’ College, Cambridge.
The Fed had signalled that a rate cut in September was on the table. But Mr El-Erian told the BBC’s Today programme that waiting “risks tipping the economy further towards a higher probability of recession.”
A number of experts have cautioned that it is premature to suggest the world’s largest economy is heading for a downturn.
But if it does, it would have wider implications.
“What happens in the US economically and financially does not stay in the US,” said Mr El-Erian.
“The US has been the major driver of global economic growth, the US consumer is a very important engine of economic activity so the world as a whole would suffer if the US were to go into recession.”
The wait for the Fed’s next meeting will also likely mean stock markets remain unsettled.
“Markets are very volatile at the moment and will likely stay volatile until the Fed decision in September, so we wouldn’t rule out rapid swings in both directions,” said Stefan Angrick, a senior economist with Moody’s Analytics.
‘Strong’
The Nikkei has swung wildly in recent days, following the Bank of Japan’s decision to raise interest rates for just the second time in 17 years.
It sent the yen soaring against the dollar making Japanese stocks – and the country’s exports – more expensive for foreign investors and buyers.
Commenting on the country’s outlook, Jesper Koll, executive director of Monex Group Japan, said he still had confidence in the country.
“Japan’s fundamentals are strong, recession risks are nil and corporate leaders are dead-set on raising capital returns,” he told the BBC.
In addition to Japan, stock markets in South Korea and Taiwan also recovered, with gains of approximately 3.5% following their record declines.