After six days of declines, equity markets staged a rebound this morning on hopes that G7 talks over the weekend may result in a coordinated approach to stemming Japan’s nuclear crisis.
Japan situation remains dire, but G7 offers some hope
As workers in Japan continue to make attempts at cooling the Fukushima Daiichi plant, the uncertainty of whether they will be successful has prompted countries including the US, France and Germany to recommend their citizens to leave the country. It doesn’t provide a lot of confidence over the situation and may exacerbate the panic mood that has gripped investors all week. PIMCO CEO Mohamed El-Erian commented that ‘The Japanese authorities themselves don’t yet have a good handle on the extent of the damage, and the continuing instability of several nuclear reactors materially increases the uncertainties,’ [1]
With the situation looking dire for Japan, the G7 will be holding talks tomorrow, which may result in a more coordinated global approach in containing the problems at the embattled Fukushima Daiichi site. This may have brought some calm to markets this morning and helped equity markets rebound following six days of decline, but it will remain to be seen how long the rebound lasts, with the situation at Fukushima showing no signs of improvement.
The Bank of Japan has been pumping short-term liquidity into the market to try and restore some stability, however the attempts have done little so far in preventing wild swings in equity and currency markets, as investors react to every new piece of information released on the crisis. The yen surged to an all-time high against the US dollar after touching 76.36 briefly overnight, before settling to 78.78 this morning. Japanese officials have blamed speculative attack as causing the spike, while traders attributed the rise to Japanese insurance companies repatriating their funds back home to fund the damages.
Naturally, speculation has now increased whether the Bank of Japan will intervene to weaken the currency. With the yen at current levels Japan’s export industry will be severely hampered. The Cabinet Office estimated that exporters can remain profitable if USD/JPY is trading at 86.30 or higher. That means USD/JPY would have to increase around 10% from current levels just to reach that breakeven level.
Spanish bond auction
Elsewhere, the euro found some support after Spain sold €4.1 billion of ten-year and 30-year debt. The total amount the government was hoping to sell was €4.5 billion but the bid-to-cover ratio for each issue was healthy at 1.81 times for the ten-year bonds, and 2.1 times for the 30-year note. The yield on the ten-year note eased to 5.162% from 5.2% for a previous auction, while the 30-year fell to 5.875% from 5.96%.
UK equities
By 10.30am (London time) the FTSE 100 was trading 38.97 points higher (+0.69%) at 5637.20, while the FTSE 250 climbed 112.42 points (+1.01%) to 11145.53.
It was a broad-based recovery on the FTSE this morning, with resource stocks in particular buoying the index. BHP Billiton, Royal Dutch Shell and Rio Tinto rose between 1.56% and 1.97%, while Kazakhmys, Xstrata and Anglo American also posted gains.
Insurance firms Prudential and Aviva both added around 1.8%, recovering from heavy falls over the past week. Prudential has now lost around 10% since the earthquake happened, while Aviva is down 7.5%.
Financials were broadly lower this morning with Man Group and Legal & General both 2.16% lower. Schroders was down 0.53% and HSBC lost 0.47%.
US pre-market
This afternoon at 12.30pm (London time), US CPI is expected to increase to 2% for the year, while core CPI is forecast to remain unchanged at 1%. US initial jobless claims may fall to 387,000 and continuing claims may ease to 3,750,000.
Industrial production is due at 1.15pm and is expected to rise by 0.6% in February. Capacity utilisation may increase to 76.5, up from 76.1 in January. The Philadelphia Fed manufacturing survey will follow at 2pm with economists predicting the gauge to fall to 30 in March, from 35.9 previously.
June Dow futures were trading 0.3% higher, while S&P futures for the same month increased 0.74%, which may suggest a positive start to Wall Street this afternoon in the absence of any negative news from Japan.
