People walk past an electronic board showing Japan's Nikkei average outside (red for gains) a brokerage in Tokyo. Photo: Reuters / Toru Hanai

Confidence returned to markets on Wednesday morning as Asian stocks rebounded on the back of a Wall Street rally on Tuesday that followed several days of deep losses.

Tuesday trading in Hong Kong, Tokyo and Shanghai had been dominated by panic-selling sparked by a record one-day nose-dive on the Dow Jones. Analysts said the sell-off looked to have run its course for the time being, although worries about rising US interest rates remain a looming challenge.

Profit-taking was also a significant factor in the retreat after months of gains that sent markets to record or multi-year highs on the back of optimism in the global economy and strong corporate earnings.

Commenting on the volatility, analysts at AMP Capital said of the prospect of monetary tightening that “the removal of stimulus in a measured way is a perfectly reasonable proposition, although it has yet again caught the unprepared by surprise. Given rates are going to rise in the Atlantic economies over the coming months, we may see further jitters.”

MSCI’s broadest index of Asia-Pacific shares outside Japan climbed 1.7%, recouping some of Tuesday’s 3.5% fall. Chinese blue chips rallied 1.2% and Japan’s Nikkei by 3.1%. The latter had slid 4.73% on Tuesday, representing its steepest fall in 15 months. Hong Kong was up more than 2.4% by the break.

Sydney rose 1.2%, Singapore 0.8% and Seoul was marginally higher. Taipei surged 2.5% and Manila was 1% higher.

“The pullback may be considered a healthy correction,” Candice Bangsund, a fund manager at Fiera Capital in Montreal, told Bloomberg News. “The favorable conditions that have underpinned the stock market rally over the last year remain largely intact at this time – the global expansion continues and corporate earnings remain in acceleration mode.”

“Given rates are going to rise in the Atlantic economies over the coming months, we may see further jitters”

Greg McKenna, chief market strategist at AxiTrader, said: “At the moment, the safe bet is that this was part of the so-called ‘sell-off we had to have.’”

The Dow had ended Tuesday up 2.33%, while the S&P 500 added 1.74% and the Nasdaq 2.13%. The Dow carved out a 1,100-point trading range in all, signifying a return of volatility to a market that until recently was marked by an absence of major shifts.

It was also a wild ride for Treasuries, with US 10-year yields diving as deep as 2.65% before a fresh sell-off dragged them back up to 2.80%.

While the pullback was a hint that risk appetite might be returning, it also had the potential to trigger another spasm of selling in stocks. The initial rout on Wall Street was sparked by a steep spike in yields last Friday. That forced leveraged funds into sell-offs, causing volatility and further ripples of cashing out.

The dollar held gains made late in New York against the yen, while the euro and pound began making inroads against the greenback. Gold was down almost 2% from Tuesday’s highs before bouncing slightly to sit 1% lower.

Energy firms soared after being pummelled the previous day, with a pick-up in oil prices lending support after a report showed US stockpiles not increasing as much as forecast.

Inpex jumped more than 4% in Tokyo, while PetroChina, CNOOC and Sinopec each added 1%-2.5%. Sydney-listed Woodside Petroleum was up nearly 2%.

With reporting from Reuters and Agence France-Presse.

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