12:16 PM
NEW YORK |
NEW YORK (Reuters) - The growing devastation in Japan may accelerate the short-term negative sentiment in a U.S. equity market already seen as vulnerable, but ongoing weakness is likely to be confined to specific sectors.
The massive earthquake and tsunami in Japan are estimated to have killed 10,000 people and left officials scrambling to avoid meltdowns at three nuclear reactors.
The disaster hit commodities markets hard on Friday, and brought on a flurry of short bets against Japanese stocks.
The effects on the U.S. market are harder to determine. The S&P 500 fell below its 50-day moving average last week and support appears to be waning, despite a rally on Friday.
In the short term, investors are likely to focus on the ramifications for energy companies, particularly nuclear power. Japanese officials said there may have been a partial meltdown at the No. 1 reactor of a nuclear plant in Fukushima.
"The disaster could prove to be a setback for nuclear power as an alternative energy source," said Jack Ablin, chief investment officer at Harris Private Bank in Chicago. "Whether or not we see a reaction in utilities and engineering and construction companies remains to be seen."
Ablin, however, did not foresee a notable reaction in the broader U.S. market.
Nuclear-powered countries may reexamine expansion efforts or expend more on safety and security at plants. President Barack Obama has been a supporter of an expanded nuclear energy program, but that will be called into question now.
In February, the White House asked for $36 billion in federal loan guarantees to help finance the building of nuclear power plants, as it did last year, which would double what the loan program already has in authority.
"Nuclear loses in the near term. Conventional oil, natural gas, and coal are the winners," David Kotok, chief investment officer at Cumberland Advisors in Sarasota, Florida, wrote in a Sunday commentary.
Nuclear energy stocks have received a boost following yearly budget proposals from President Obama. The Van Eck Market Vectors Nuclear Energy exchange-traded fund (NLR.P) hit a 52-week high on February 8, rising 7 percent in the two weeks after Obama's 2011 State of the Union address.
The quake triggered an increase in risk aversion, with nervous Japanese liquidating investments overseas and bringing capital back to yen-denominated assets.
The dollar fell 1.2 percent to 81.87 yen on Friday, while shares of the CurrencyShares Japanese Yen Trust (FXY.P) rose 1.3 percent to $120.62. The yen may come under pressure, however, if the reconstruction worsens the country's already-heavy debt burden.
OIL, MIDDLE EAST STILL WEIGH
Investors are also still grappling with political protests in the world's top oil exporter, Saudi Arabia.
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