(Updates throughout, adds European open, comments; refreshes prices at 0803 GMT)
Global stocks rallied on Tuesday, partly reversing some of the previous day's brutal declines, while the Japanese yen retreated modestly, after central bank officials said all the right things to soothe investor nerves.
The Nikkei .N225 soared more than 10% to above 34,500, rebounding sharply from its 31,458 close on Monday. The index plummeted 12.4% in the previous session in its biggest daily sell-off since the 1987 Black Monday crash.
Wall Street also looked steadier, with S&P 500 futures ESc1 up 1%, while Nasdaq futures NQc1 rose 1.4% and Europe's STOXX 600 index .STOXX edged up by 0.7%, regaining some stability after Monday's 2.2% drop.
The S&P 500 .SPX lost 3% on Monday, while the Nasdaq .IXIC slumped 3.43%, extending a recent sell-off as fears of a possible U.S. recession spooked global markets.
Yields on 10-year Treasury notes US10YT=RR were back at 3.84%, having been as low as 3.667% at one stage.
"If you wake up in the morning to discover that Japan is down 10-12%, it’s going to scare the daylights out of the sanest person in the world, so it's understandable that people take flight," IG chief market strategist Chris Beauchamp said.
"On the flipside, I think people got a bit carried away yesterday and it always seems very dramatic at the time," he said. "It’s normal to see weakness this time of year. The question is - was that enough to reset markets or is there going to be more?"
Federal Reserve officials sought to reassure markets with San Francisco Fed President Mary Daly saying it was "extremely important" to prevent the labor market tipping into a downturn. Daly said her mind was open to cutting interest rates as necessary and policy needed to be proactive.
"The Nikkei's enjoying a decent retracement against Monday's plunge, as comments from the Fed's Daly and a stronger-than-expected ISM services report soothed fears of a panic Fed cut next week," said Matt Simpson, a senior market analyst at City Index in Brisbane.
"But this is not exactly a risk-on rally. And we are not yet sure if this is just a breather between water-boardings or there is more pain to follow."
UNWINDING THE UNWINDING Currencies also reversed some of Monday's sharp moves, as the dollar rose 0.7% to 145.31 yen JPY=EBS , having dropped 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 against the Swiss franc, rising 0.4% to 0.8555 francs CHF=EBS from a low of 0.8430.
Treasury yields had also come off their lows, in part in reaction to a rebound in the U.S. ISM services index to 51.4 for July. In particular, its employment index jumped 5 points to 51.1, suggesting last week's payrolls report may have overstated the weakness in the labour market.
"Gauging the bottom of such historic selloffs is complicated and investors will most likely remain cautious before pouring capital back into equity markets," said Boris Kovacevic, Austria-based global macro strategist at payments firm Convera.
"However, the dollar-yen pair has now fallen 12% since peaking five weeks ago and is in highly oversold territory. The yen is therefore vulnerable to any upside surprises in U.S. macro data leading investors to reconsider the recession trade. This would help Japanese equities stabilize," he said.
Market expectations the Fed would cut by 50 basis points at its September meeting remained intact, with futures implying a 71% chance of such an outsized move.
The market has around 100 basis points of easing priced in for this year, and a similar amount for 2025. FEDWATCH
In precious metals, gold failed to get a safe haven bid amid talk investors were taking profits to cover losses elsewhere. But by Tuesday, it had found a firmer footing, holding steady on the day at $2,408 an ounce XAU= , having lost 1.52% overnight.
In energy markets, oil prices bounced early Tuesday as the risk of a wider conflict in the Middle East picked up after news that several U.S. personnel were injured in an attack against a military base in Iraq.
Brent crude futures LCOc1 were last up 0.9% at $77 a barrel, having hit a seven-month low of $75.05 the day before.
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