Business Blog Posts

Regional stocks had just been picking up after a sell-off in recent weeks because of a combination of inflation, higher oil prices and frothy valuations, when the March 11 earthquake and tsunami in Japan dealt them another blow.

But the latest plunge has brought equity valuations within the region to average levels and markets particularly in North Asia are attractive, said Markus Rosgen, head of Asia ex-Japan strategy at Citigroup.

"From a technical perspective, Asia-ex Japan is very oversold. Much of the bad news is in the price of Asian equities and monetary policy is not hugely restrictive," said Rosgen, who predicts the MSCI ex Japan at 675 points by the end of the year, a gain of nearly 50 percent from current levels.

Investors may also have been reassured by reports of progress in repairs at a crippled Japanese nuclear power plant, and by comments by billionaire investor Warren Buffett that the recent steep drop in Japanese stocks presented a "buying opportunity".

The Nikkei .N225 plunged 10 percent last week as the nuclear crisis worsened, pulling shares in the rest of Asia down nearly 3 percent and weighing on markets in the United States and Europe, including riskier assets such as oil.

On Monday, the MSCI index of Asian shares outside of Japan .MIPAJ0000PUS was up nearly 1 percent though investors kept a wary eye on the battle by Japanese authorities to contain deadly radiation from crippled nuclear plants and a rising death toll following the earthquake and tsunami earlier this month.

For the quarter so far, Asian-ex Japan is down nearly 5 percent, underperforming its counterparts in Europe and the United States.

Japanese markets were closed on Monday for a holiday.

OIL UP

Brent oil futures jumped more than 2 percent at one point in early trade, topping $116 per barrel, after Western warplanes and missiles hit Libya at the weekend in a bid to force leader Muammar Gaddafi to cease fire on rebels and end attacks on civilians.

Unrest in Syria and Yemen over the weekend also kept traders on edge.

With a good chunk of Japan's nuclear power capacity likely knocked out for good, its reliance on fossil fuels such as oil and natural gas will increase, preventing oil prices from retreating sharply from current even if the Libyan conflict is resolved swiftly. So far this quarter, oil is up by more than a fifth.

Higher fuel prices will revive investors' concerns about inflation and the prospect for further interest rate increases, especially in emerging economies.

"I can see uncertainty and fear driving the price of oil higher in the short term," said Matthew Lewis, an analyst at CMC Markets in Sydney.

Until a clearer picture emerges, they will want to steer clear of riskier assets as they recalibrate positions.

One thing seems certain: Oil prices will renew their advance posing a new challenge for global recovery. Some analysts said benchmark Brent crude could surge $5 toward the recent two-and-a-half year peak of $119.79, after closing Friday at $113.93 a barrel.

Western forces pounded Libya's air defenses over the weekend to repel Libyan leader Muammar Gaddafi from rebel strongholds as they enforced a U.N. Resolution. The attacks are set to continue in coming days. Analysts said the strikes create fresh uncertainty.

"It's an open-ended question because we don't know whether the air strike on Libya will turn into a quagmire or a quick victory,' said Boris Schlossberg, a currency strategist at GFT in New York.

"If the situation drags on, this will make investors pull in their horns because it creates yet another geopolitical hotpoint."

The United States said Sunday it expects to conduct more air strikes on Libya as part of enforcing a U.N. resolution.

As the Japanese nuclear crisis unfolded last week and the death toll from the tsunami rose, investors pulled out of riskier assets pressuring global stocks, while the yen surged on the prospect of Japanese investors bringing their money home.

Oil already had advanced last week and further gains could threaten to manacle future global economic growth. It is enough to make some longer-term investors freeze, or at least sit on the sidelines and not make major moves.

"The situation is too fluid and too uncertain to warrant changes," Joost van Leenders, strategist at BNP Paribas Investment Partners, said in a note to clients.

Equity market losses since the earthquake in Japan have been around 2 percent, as measured by the MSCI World Index. In Tokyo losses were worse., falling 10 percent. Volatility has risen, but is still far from where it was during the height of the euro-zone debt crisis.

Aside from Libya, Bahrain is also in focus, having cracked down on mainly Shi'ite Muslim protesters, a move that has angered Iran and raised tensions in the oil-exporting region. In Yemen, the president sacked the cabinet after deadly protests. Unrest shook Syria on Sunday and Saudis gathered to demand the release of prisoners.

OIL, JAPAN ARE KEY

The heart of the uncertainty for investors is what rising oil prices and Japan's earthquake, tsunami and nuclear breakdown will mean for the world economy and financial markets.

The initial reaction to Japan was that the global economy would cope quite well, seeing only 0.2 percent or so trimmed from global growth that was running above trend around 4.4 percent.

Cataclysmic events, including a nuclear disaster in Japan, uprisings in the Middle East and North Africa and the possibility of more currency market intervention will keep investors reacting to headlines.

"This is an extremely news-driven market. Investors are on the edge, and they are reacting to every headline they see," said Randy Frederick, director of trading and derivatives at the Schwab Center for Financial Research in Austin, Texas.

Many investors said the sudden increase in uncertainty had caused a corresponding rise in trading based on emotion rather than facts or fundamentals.

"Considering how the market's been moving recently, I wouldn't be surprised to see the S&P moving 1 to 1 1/2 percent both up and down in less than couple hours next week. That's how much volatility there is," said Ryan Detrick, a senior technical analyst at Schaeffer's Investment Research in Cincinnati, Ohio.

The volatility on Wednesday caused the S&P 500 to erase its gains for the year and then rebound more than 1 percent on Thursday.

Besides global developments this week, markets will get to respond to economic data on U.S. housing, gross domestic product and durable goods orders, but these may be relegated to second place behind traders' reaction to the latest headlines.

WALL STREET'S FEAR GAUGE

The CBOE Volatility Index VIX .VIX, Wall Street's so-called fear gauge, shot up nearly 30 percent on Wednesday when equities swooned after confusing statements from officials on the situation in Japan.

The gauge rose nearly 60 percent above its 50-day moving average, which has happened only a handful of times in the past 20 years.

Despite the 21 percent rise in the VIX for the week, traders bet the fear gauge would move higher. Call buying outpaced put buying on Friday, with about 232,000 calls and 111,000 puts, although both were below their average daily volume, according to options analytics firm Trade Alert.

The VIX, which often moves inversely to the S&P 500, measures the cost of hedges or protection investors are willing to pay against a fall in the S&P 500. The heavy call volume suggests expectations for more anxiety in the future.

"What makes this so difficult is that these issues are beyond the expertise of the market," said Russ Koesterich, an investment strategist at BlackRock Inc, which oversees $3.56 trillion.

"It's hard to say how severe the situation in Japan will get or how stable things will become in the Middle East, and that increases the downside risk."

Some market participants said the uncertainty was even more dramatic than the "flash crash" last May or the 2008 financial crisis.