Japan’s Nikkei dives 7.3% in spectacular U-turn Asia Markets

By V. Phani Kumar, MarketWatch

HONG KONG (MarketWatch) — Japanese shares suffered their worst losses in more than two years on Thursday after data showing an unexpected contraction in Chinese manufacturing activity added to worries the Federal Reserve could downscale its bond purchases.

The Nikkei Stock Average /zigman2/quotes/210597971/delayed JP:NIK +0.15% , which had jumped 2% earlier on Thursday, ended the day 7.3% lower at 14,483.98 in a spectacular turnaround. The drop is the Nikkei’s worst single-day loss since March 15, 2011, when the market was overwhelmed by selling in the wake of a calamitous earthquake and tsunami. The benchmark’s closing level was nearly 1,460 points from the day’s peak.

The Nikkei is still up nearly 40% in 2013 to date, thanks to a massive rally seen earlier in the year as the yen’s weakness aided an improvement in corporate earnings and profit outlook.

Reuters

Thursday’s slump came after a surge in Japanese government bond yields, which forced the Bank of Japan to offer 2 trillion yen ($19 billion) in funds to calm investor nerves. The central bank announced the fund-supplying operation after 10-year JGB yields soared to their highest level in more than a year, citing “the unreasonable increase” in volatility.

“Volatility is in full force today, and nowhere more so than Japan,” said Chris Weston, chief market strategist at IG Markets.

“Perhaps this is a function of the higher yields, and it’s something that needs to be addressed for ‘Abenomics’ to really work,” he said.

Abenomics refers to the economic policies under the administration of Prime Minister Shinzo Abe. The day’s intraday jump in JGB yields comes a day after BOJ Gov. Haruhiko Kuroda played down concerns about recent volatility in the domestic bond market.

While climbing JGB yields warranted close monitoring, “at this point, I am not expecting them to have any significant impact on the real economy,” Kuroda said on Wednesday, according to a Dow Jones Newswires report.

The massive reversal for Tokyo stocks ensued in the afternoon trading session, after preliminary results of HSBC’s China manufacturing Purchasing Managers’ Index for May dropped to a seven-month low of 49.6.

The volatility also followed choppy moves in Treasurys overnight, and a sharp pullback for stocks on Wall Street. Those moves came in the wake of Fed Chairman Ben Bernanke’s remarks Wednesday that the central bank could begin to wind down its bond purchases in the “next few meetings.” Similar signals also emerged from the Fed’s last policy-meeting minutes.

Other regional markets also hit

Also taking big losses in Asia, Hong Kong’s Hang Seng Index /zigman2/quotes/210598030/delayed HK:HSI +1.11% tumbled 2.5%, while Australia’s S&P/ASX 200 /zigman2/quotes/210598100/delayed AU:XJO +1.04% skidded 2%.

Taiwan’s Taiex /zigman2/quotes/210598069/delayed KR:180721 +1.07% lost 1.9%, and South Korea’s Kospi /zigman2/quotes/210598069/delayed KR:180721 +1.07% fell 1.2% as the China PMI reading added to fears about growth momentum in the world’s second-largest economy. The reading was below the 50-point threshold that separates improvement from deterioration in factory conditions, and also lower than the expected result of 50.4.

“A sequential slowdown is likely in the middle of [the second quarter], casting downside risk to China’s fragile growth recovery,” said HSBC chief China economist Hongbin Qu.

Singapore’s Straits Times Index /zigman2/quotes/210597985/delayed SG:STI +0.51% lost 1.9% in afternoon trading, even though the local economy unexpectedly expanded 1.8% on an annualized basis in the first quarter from the preceding three months.

The Shanghai Composite Index /zigman2/quotes/206600939/delayed CN:000001 +0.32% itself ended 1.2% lower, weighed down amid the region’s losses. The benchmark had briefly edged higher earlier in the day, recovering from losses posted before the HSBC PMI release.

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