Libyan government officials were scrambling today to prevent events overtaking them. Just one day after declarations by the Colonel that his forces would have no mercy in Benghazi, the rebel headquarters, the foreign minister of the regime was declaring a cease-fire and speaking ambiguously about the appropriateness of the U.N. Resolution enforcing a no-flight zone over the country. The events in Libya and the Middle East appear to be headed for a lull for now, but the changes of the past two or three months have been monumental in terms of their effect, and are unlikely to have reached their climax yet.
As expected, the BoJ today intervened in the FX market, supported by the central banks of the G7. We regard this development as the termination of the JPY uptrend, and expect the government to borrow aggressively in the domestic market in order to finance construction and rebuilding projects. With U.S. objections to intervention eliminated in consequence of the earthquake and the ongoing nuclear crisis it is but a matter of time before the BoJ gains the upper hand against speculators. The U.S. was only interested in saving face against China and was never serious about Japan`s FX interventions and the earthquake will serve as a suitable excuse to let the BoJ have its way. The country`s FX reserves are likely to remain at high levels, provided that no major commodity price spike occurs.
Markets were upbeat today, in response to reasonably positive developments related to the nuclear crisis, and various bullish data releases from companies in the U.S. Gold and oil were higher, and the USD was lower against riskier currencies, while safe-haven government bonds depreciated slightly. Markets would like to forget about oil and Japan as quickly as possible, and with so much cash floating around and being pumped by the Fed and the BoJ it is no surprise that the bullish mood remains resilient in the face of very severe challenges.
As we end the week, we are left with the nuclear issue and the Libyan civil war as the main issues dominating the headlines, but it is our opinion that instability more than any specific problem is the theme of the quarter, as more and more crises erupt at seemingly unexpected times and quarters. A lot of people have been expecting a crisis in the Japanese government bond market, but we don`t think that the occurrence of a devastating tsunami and a nuclear crisis was in anyone`s mind. As such, and in alignment with the dominant cyclical trend driving events, we expect more shocks and higher volatility to determine market direction for the foreseeable future, even as stock prices appreciate on the back of government interventions and distortions caused by them. Gold remains our favored investment choice in a balanced portfolio that does not depend excessively on the performance of any asset class, with a healthy proportion of cash and related holdings.
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