Hong Kong
CNN
—

The recovery in Japanese stock markets has rapidly lost momentum as fears of a US economic slowdown and further yen volatility cast their shadows over global financial markets.

The Nikkei 225 closed down 0.7 percent on Thursday, ending a two-day winning streak. The yen gained 0.6 percent against the U.S. dollar to 146, after losing almost 2 percent on Tuesday and Wednesday combined.

Japan’s benchmark index had risen sharply in the last two trading days after its dramatic slump on Monday, as words from central bank officials offered some comfort to investors.

But Thursday’s cold weather also spread to Europe, and the leading index Stoxx Europe 600 was down 1 percent by 3:43 a.m. ET. The German DAX and the French CAC 40 lost 0.8 percent and 1 percent respectively, while the London FTSE 100 was down 1.1 percent.

US futures also signaled a weak start for stocks on Wall Street. S&P 500 futures lost 0.5 percent and Nasdaq futures lost 0.4 percent.

On Wednesday, Bank of Japan (BOJ) Deputy Governor Shinichi Uchida said policymakers would not raise interest rates “if financial markets are unstable,” seeking to calm nerves after expectations that Japan would further tighten monetary policy sent markets into a tailspin on Monday.

The yen’s rise, which began when the BoJ signaled tighter monetary policy in recent weeks, forced many hedge funds and other investors to unwind so-called carry trades, a popular investment strategy that involved borrowing money very cheaply in Japan to invest in other markets. The reversal exacerbated the decline in global equity markets.

Uchida said Wednesday he believed the U.S. economy would make a soft landing, even as concerns grew that the Federal Reserve had fallen behind on its interest rate cuts.

But These fears, as well as the risk of a further increase in the value of the yen, are still preoccupying the market.

“The potential for a broader economic downturn in the US, misguided global monetary policy and simmering geopolitical tensions in the Middle East are casting long, ominous shadows over financial markets,” said Stephen Innes, managing partner of SPI Asset Management.

The volatility in The The yen, which has been at the centre of recent market turmoil, remains at high levels, he added.

On Monday, the Nikkei index recorded its biggest drop since 1987, triggering a general sell-off in global markets.

Although the BoJ deputy governor downplayed a near-term rate hike, his words were “not aimed at changing the course of monetary policy,” said Alex Kuptsikevich, senior market analyst at FxPro.

In Japan, inflation was close to the target of 2% The BOJ has set that rate for nearly two years, allowing the central bank to end a streak of zero interest rates. Meanwhile, the Federal Reserve is struggling with slowing price growth and a cooling labor market and is widely expected to cut rates at its September meeting.

The narrowing of interest rate differentials that made the yen carry trade possible could push the yen exchange rate higher, Kuptiskevich added.

If the US falls into a recession and the Fed pursues aggressive monetary easing, “we would not be surprised if the dollar falls to 120 yen or below,” Masamichi Adachi, chief economist for Japan at UBS, wrote on Wednesday.

The global trading environment will remain unpredictable in the future, with many uncertainties lurking in the shadows, Innes said.

“The US election is just around the corner and could turn the markets into a chaotic mosh pit rather than a graceful waltz,” he added.

Analysts at UBS’s Chief Investment Office wrote on Thursday that the outcome of the election was too uncertain to predict a winner three months before Election Day.

“We advise investors to avoid making excessive portfolio changes dependent on specific election results at this time,” they wrote.

In other Asian markets, South Korea’s Kospi closed 0.5 percent lower, also ending a two-day winning streak. Taiwan’s Taiex closed down 2 percent. Hong Kong’s Hang Seng was recently unchanged.