Wall Street strives to rebound, Tokyo soars after rout

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Wall Street stocks sought to rebound on Tuesday following a global rout fuelled by US recession fears, but European equities failed to hold onto early gains.

Tokyo, which suffered a record loss Monday, led gains in Asia to close up more than 10 percent as traders bought beaten-down stocks caught up in a catastrophic start to the week for markets.

But analysts warned there may likely be more volatility to come.

"We might not be out of the woods yet," said market analyst Fawad Razaqzada at City Index and FOREX.com.

Monday's sell-off followed data Friday showing fewer US jobs than expected were created last month, while another report pointed to continuing weakness in the manufacturing sector.

That led to warnings the US Federal Reserve had kept rates at more than two-decade highs for too long and risked causing a recession.

Monday's plunge was also triggered by a rally in the value of the yen which threw a wrench into a common trading strategy of borrowing at low interest rates in Japan and investing in high yielding assets elsewhere, like US tech stocks.

But with the Bank of Japan raising interest rates last week and the Fed poised to cut rates, this so-called yen carry trade was at risk and many investors needed to dump assets to cover their positions, magnifying the rout.

With the yen falling back on Tuesday, the markets were calmer.

"The carry-trade unwinding might have settled down for now, but this market is understandably leery of it revving back up given how entrenched it had become with Japan holding rates below zero, or near zero, for so long," said Briefing.com analyst Patrick O'Hare.

David Morrison, senior market analyst Trade Nation, said "we have no idea how far through the carry-trade unwind we are", adding "the probability is that this isn't over."

Still, Wall Street stocks began the day with a bounce, with the Nasdaq Composite rising 0.5 percent after having lost more than three percent on Monday.

"There is some buy-the-dip interest... Still, it is fair to say that it is not a hard-charging rebound effort given the scope of recent losses," added O'Hare.

European stocks couldn't hold onto early gains and slumped lower in afternoon trading.

Monday's stock plunge sparked speculation that the US central bank could carry out an emergency cut to interest rates to stave off a recession.

Analysts have downplayed that possibility.

"Emergency intervention from the Fed seems unlikely," said Richard Hunter, head of markets at Interactive Investor.

Briefing.com's O'Hare said the market also remains leery of the US economy slowing more than expected.

He pointed to reassuring data, including the US trade deficit narrowing in June, with both imports and exports increasing, "which is a constructive trade dynamic for the global economy".

A forecast-beating read on the key US services sector on Monday also provided some reassurance that the world's largest economy isn't heading headlong into recession.

- Key figures around 1330 GMT -