Japan is being brought to its knees after the Nikkei plummeted over 10% last night and the follow through to Europe is dragging stocks even lower as the prospect of a serious environmental catastrophe is being considered.
Last night’s move was the third worst decline in the Nikkei’s history and there’s fear that there could be more to come. The index has now lost sixteen percent in two trading sessions taking it to 8600. Since its close at least the futures have ticked higher to 8750, but this is more likely to be short covering more than anything else.
As the costs of the disaster escalate and the Japanese government pump money into their system to commence the clear up, which God forbid could get worse, at least credit ratings agencies are giving the country some time to breathe instead of cutting their rating which unfortunately is inevitable down the line.
The Bank of Japan’s interest rate decision last night saw them keep rates on hold which was expected to be the case before the disaster, as well as keeping the existing asset purchase program going. It’s hard to see now any prevention of the country slipping back into recession even with all the new impetus. Japan was expected to grow some 1.6% in 2011 and as things stand this disaster could wipe out three, four or even five percent of its GDP.
Later on today, this evening in fact, the US Federal Reserve announce their interest rate decision – hum, I wonder what that decision will be – nothing is expected so traders will be focusing on the statement that comes with the decision. What’s their view on the price of oil, inflation and the possibility that it might hamper growth? Will they mention anything about winding down the current asset purchase program? Will their language become a little more hawkish? All questions that the market hopes will be answered this evening.
Currencies saw a bit of dollar weakness but by all standards were quite placid, but this morning the greenback is back in favour as a safe haven. Yesterday, euro investors continued to see sentiment improve as EUR/USD moved back towards the 1.4000 level. The loosening of the conditions has been welcomed but they still don’t guarantee that either Greece or Ireland won’t default or Portugal or Spain won’t need a bailout. The move also doesn’t give these big spenders the reality check required for them to get their houses in order and for as long as members of the EU think that they can get away with a bailout if things go wrong, it doesn’t act as a huge deterrent. This morning EUR/USD is at 1.3935 and levels to watch are 1.3965/1.4000 to the upside and 1.3890/1.3845 to the downside.
Cable too had a renaissance taking it back to the 1.6200 level. This morning we’re back down at 1.6082 so levels to keep an eye on over the short term are 1.6140/1.6170 above and 1.6050/1.5980 below.
Gold also saw rather an uneventful session yesterday as it drifted sideways. The pressure on equities is also having a bit of an effect on the precious metal and other commodities that are suffering from the recent bout of risk aversion. At the time of writing gold is at 1413 so resistance is seen around 1423/1432 and support is around the 1400 area.
Crude prices recovered from earlier losses, but overnight has seen further selling. A lot of hedge funds remain long the black stuff and the market seems to have taken the Japanese earthquake in its stride. The unrest in MENA continues to keep the price underpinned, so we’re yet to see a serious unwinding of long positions as yet. Brent is at 112.30 this morning and Nymex at 100.50.
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