Nikkei futures were trading at 33,640, suggesting the cash market could open around 2,000 points higher from its 31,458 close on Monday. The index had shed 12.4% in its worst selloff since the 1987 Black Monday crash.
“After the breathtaking and historic moves seen across Asian markets yesterday, driven predominantly by a significant liquidation of margin positions, we look for a solid counter rally on open today,” said Chris Weston, head of research at broker Pepperstone.
However, he cautioned that the level of implied volatility for the Nikkei was at a stratospheric 70%, suggesting fireworks were likely for some time yet.
“After such a furious shake-out of leveraged positioning, with Japanese banks absolutely taken to the cleaners, it will take the bravest of investors to buy with any conviction.”
Currencies were also calmer as the dollar edged up to 144.24 yen , having sunk 1.5% on Monday to as deep as 141.675. The yen has shot higher in recent sessions as investors were squeezed out of carry trades, where they borrowed yen at low rates to buy higher yielding assets.
The dollar pared its losses on the safe-haven Swiss franc, holding at 0.8526 francs from a low of 0.8430.
“The fact that there was such a strong unwind in the dollar/yen, in turn forced investors to take some profits where they’ve been hiding out this year, which has been mostly big tech,” said Kevin Gordon, senior investment strategist at Schwab.
“It’s become the biggest target because it was the best performer and that’s probably the easiest spot for traders to take their profits.”
Yields on 10-year Treasury notes were back at 3.804%, having been as low as 3.667% at one stage.
Federal Reserve officials did their best to reassure markets with Fed San Francisco President Mary Daly saying it was “extremely important” to prevent the labor market tipping into a downturn.
Daly added that her mind was open to cutting interest rates as necessary and policy needed to be proactive.
The comments underpinned market expectations that the Fed would cut by 50 basis points at its September meeting, with futures implying an 87% chance of such an outsized move.
The market has around 115 basis points of easing priced in for this year, and a similar amount for 2025.
In energy markets, oil prices bounced early Tuesday as news that several U.S. personnel were injured in an attack against a military base in Iraq stoked fears of a wider conflict.
U.S. West Texas Intermediate crude futures CLc1 climbed $1.18, or 1.6%, to $74.12 per barrel.
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Reporting by Wayne Cole, with Sinéad Carew and Nell Mackenzie;
Editing by Shri Navaratnam
Our Standards: The Thomson Reuters Trust Principles.