A look at the day ahead in European and global markets from Vidya Ranganathan

It's happening all-at-once again in markets. A powerful rally has lifted Japan's Nikkei and Asian stock markets, and European and U.S. stock futures indicate they will follow too.

Given the confluence of factors that drove the selloff - Japan's rate hike, an unwind of yen-funded global trades, weakness in U.S. jobs and Middle East tensions - strangely, all it took was a soothing message from central bank officials to turn things around.

As Europe wakes up, the Nikkei is up 9%, nearly erasing the 12.4% decline on Monday that pushed it into bear market territory.

Wall Street is looking steadier, with S&P 500 futures rebounding 1.5%. The three-day rout cost the S&P 500 8% of its value.

The Europe-wide STOXX 600 index seems set to rise, after it logged its steepest three-day decline since June 2022 on Monday, closing below the key 500-point mark for a second day.

Sceptics are quick to remind us that Japan is not the proverbial canary, as it has always come back fast from a sell-off. Given lingering concerns over inflated tech earnings and the view the Fed may have held rates too high for too long, the carnage may not be over.

Add to that the still heavy overhang of yen-funded investments globally, not just in U.S. stocks but also in emerging market high-yielders such as India's rupee, Mexico's peso and South Africa's rand.

Currencies are reversing some of Monday's sharp moves, with the dollar edging up to 145.50 yen from as deep as 141.675 and up against the safe-haven Swiss franc too.

As fear gauges go, junk bond spreads have blown out and are ones to watch. Another recession indicator - the gap between two-year and 10-year Treasury notes - turned positive for the first time since July 2022 on Monday.

The Nikkei volatility index is still double levels it was at last week. The STOXX volatility index ended Monday not too far from its highest level since March 2022, while S&P volatility is also still elevated.

As fear subsides, Germany's safe-haven two-year bond yield should recover further. It hit its lowest level since March 2023 on Monday.

Key developments that could influence markets on Tuesday:

* Economic data: Germany industrial orders for June; UK S&Pglobal construction PMI for July; euro zone retail sales forJune; Federal Reserve Bank of New York Q2 household debt andcredit report; U.S. trade data * Europe earnings: abrdn PLC, Adecco Group AG, Bayer AG,Galenica AG, InterContinental Hotels Group PLC * Debt auctions: Reopening of German five-year governmentdebt auction; reopening of UK 19-year government debt auction