Japan’S Nikkei 225 Index Recovers In Opening Trade Day Following Its Worst-Ever Drop.

Japanese stocks have made a significant recovery after experiencing the largest market drop in history during the previous trading session.

Only one day later, new investors with a higher risk appetite responded, causing the market to rise by over 3,200 points. Eventually, it settled at a 2,957.90 point rise, representing a roughly 9.4 percent increase compared to the previous day’s trading. This surge marks the largest single day rise since October 1990 when the Nikkei 225 surged by 2,676.55 points. However, overall, the index is still down approximately 20 percent from its all-time high on July 11.

In addition to the Nikkei’s plunge, the wider stock and crypto markets are also experiencing significant volatility.

According to Chris Weston, head of research at Australian online broker Pepperstone, the drop in Japan’s Nikkei 225 was triggered by massive liquidation of margin positions.

The implied volatility in the NY225 currently sits at an astonishing 70%, surpassing the levels observed in 2020. While the opening call for the Nikkei 225 suggests a 6% higher start, such a level of implied volatility almost guarantees intense price fluctuations.

Following such a drastic shake-out of leveraged positioning, where Japanese banks were severely affected, it would require considerable bravery for investors to confidently invest in these names.

Japan’s banking stocks led the August 5th sell-off. Other Japanese companies, including Honda Motor Co., experienced a decline of 13.4 percent, while Mitsubishi UFJ Financial Group saw a drop of 18.4 percent, and Tokyo Electron plunged by 15.8 percent.

The crypto market witnessed its largest three-day sell-off in almost a year, resulting in a loss of nearly $510 billion from the total market capitalization. This decline represents a 15.9 percent drop in the global crypto market cap. The S&P 500, an index tracking the performance of the 500 largest companies listed on US stock exchanges, also recorded a 3 percent drop, marking its worst day in nearly two years. Similarly, the Nasdaq stock exchange in New York slid by 3.4 percent.

Japan’s Finance Minister, Shunichi Suzuki, stated on August 5th that the government was monitoring the market, but it was challenging to determine the cause of the significant plunge in the Nikkei 225.

Stephen Dover, chief market strategist and head of Franklin Templeton Institute, believes that the collapse serves as a reminder that diversifying equity risk by region, sector, or style during major corrections or bear markets is nearly impossible.

He also cautioned that while opportunities will arise, it is currently premature to step in at this point.