Weekly Market Review by Cliff Wachtel - Mar. 21, 2011
The Great Japanic: This Week's Crisis
As we see from the weekly chart of the S&P 500, the almost uninterrupted rally in risk assets since September was halted during the week of beginning February 20th.
Since then, risk assets have finished lower 3 out of the 4 past weeks because each of those weeks' markets were scared and fixated on a different crisis that threatened to become a long term economic burden on global growth:
- Week Beginning Feb 21th: MENA unrest spreads to a real oil producer, Libya, and causes spiking oil prices on fears of supply interruptions.
- Week Beginning March 7th: EU Crisis fears return as spiking PIIGS yields, an imminent Portugal bailout, fears that the EU won’t take decisive action to prevent defaults until there is a full blown market crisis and a growing conflict between Ireland and the EU that could lead to a general restructure of all PIIGS debt and result in EU bank losses that could threaten confidence in the EU banking system.
- Week Beginning March 14: Damage from an earthquake off the Northeast coast of Japan, a tsunami and nuclear reactor meltdowns that followed, casts uncertainty about the short and longer term health of the world’s third largest economy and about how that will effect global markets.
Let’s focus on the Japan crisis, which dominated markets last week
While estimates have been offered and the market showed signs of calming towards the end of the week, the fact is that the risk of more damage from quakes and radiation is high: Aftershocks: In the case of an 8.9 magnitude quake, the odds are there will be one aftershock of more than eight on the scale and 10 of more than seven. So far, we have only had one that has been more than a seven. Meanwhile, aftershocks are moving toward Tokyo. These could easily bring significant further damage and production stoppages for Japan’s exporters. That in turn threatens production for a variety of global industries that depend on Japanese steel, silicon wafers, and other production. For example, much of Apple’s iPhone and computer output is from Japan. Volvo has already reported that truck production may halt from lack of parts from Japan.
Radiation Leaks: As of this writing attempts to restore cooling to nuclear fuel rods have failed. If they overheat and ignite, they will release radiation on a magnitude that could potentially exceed even that of the Chernobyl disaster. The potential radiation in the spent fuel pools is said to be between 20-50 million curies. That’s 3-8 times the magnitude of Chernobyl. For perspective, the worst nuclear accident ever, the 1986 Chernobyl meltdown, released about 40% of the reactor’s 6 million curies. That was enough to render the surrounding areas uninhabitable, sent radiation clouds over hundreds of miles reaching as far as Sweden. The total cost of resettling inhabitants, cleaning and sealing the area and paying off medical claims is estimated be around US $235 billion—with another billion or two added to replace the decaying sarcophagus that envelopes the reactor core and prevents new releases of radiation.
Japan Was the Focus, but EU and MENA Regions Continue to Boil
When reports first came out early Friday March 11 of the damage from earthquake and tsunami that followed, market reaction was muted. However, by Monday it was clear that the affects could extend to global markets.
Damage from the worst quake in Japan’s history (9 out of 10 on the Richter scale) included massive power outages as nearly a dozen nuclear plants shut down, leaving millions without power and causing production shutdowns at factories.
Japan faced a risk of a serious release of radiation which, if it reached Chernobyl proportions, could add another $200 billion or more to the final costs. Stocks related to nuclear power fell hard and the entire nuclear industry risks a prolonged period of difficulty.
Meanwhile, the EU and MENA regions, each of which produced the crises that pounded markets in the prior weeks, continued to boil, though markets ignored them.
Three Crises Could Move Markets This Week
Japan – Further damage from aftershock quakes (expected to be strong) and radiation leaks could pound markets yet again.
The EU – Portuguese and Spanish bond yields remain at near record highs. Portugal is likely to seek a bailout soon. However, the real news may be that Ireland has withheld further funding for its insolvent banks until it gets a better bailout deal. This means these Irish banks will default on their next bond payments. The EU banking system is the primary holder of these bonds, particularly banks in the UK and Germany and any default threatens to shake confidence in them and in the EU banking system. That would be the EU’s worst nightmare. However any concessions given to Ireland will be demanded by Greece and Portugal too, which would be another hit to the EU banks that hold those bonds.
The MENA Region – Bahrain: Supported by Saudi troops, Bahraini forces violently suppressed the mostly Shiite protesters, sparking retribution threats from their supporter, Iran. The question is, could Bahrain blow up into a proxy war between Sunni Saudi Arabia and Shiite Iran?
Libya: Gaddafi’s superior military strength sent rebel forces into near collapse. A last minute attempt by Western governments to threaten military intervention may keep this conflict from being settled with a Gaddafi victory.
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Cliff Wachtel, CPA, is the Chief Market Analyst for anyoption.com. He provides both daily and weekly news analyses, special reports, trade recommendations, VIP advisory services and trader training. He is a widely followed online forex, commodity, and stock commentator, and is a top ranked contributor for a variety of online publications like Seekingalpha.com, Forexfactory.com, and many others. |