Speculators around the world are worried that the earthquake, the tsunami, and the nuclear disaster will cause their casino to collapse on their heads, which naturally benefits the yen as it is the main victim fundament of all speculative games. It is inconceivable that without the perennial availability of easy money from the BoJ, any of the subprime, stock, or commodity bubbles would have inflated to the extent that they did.
The U.N. Security council holding a special meeting, the Japanese asking for help from the IAEA and the U.S., citizens locking themselves up in their houses hoarding food and goods, and warnings of massive blackouts in Tokyo and elsewhere have not placed the market in an exceptionally pessimistic mood today. We believe that this is a reaction to the last days` sharp sell-off, as bargain hunters try to get their hands on "cheap" stocks, while sellers take a break. But there is still some discussion among Japanese authorities regarding the necessity of putting the Nikkei Stock Exchange on holiday for a while.
At Fukushima, the pools that store the spent fuel of the past 20 years or so were exposed completely to the air yesterday after explosions destroyed the concrete casing of one of the reactors, and attempts to cool the fuel rods failed. Today the Japanese Self-Defense Force (SDF) was flying helicopters over the reactor building trying to raise water levels in the exposed fuel rods, but it is reported that the pools can hold up to 200 tons of water, so to fill them up the SDF must deliver nearly 50 tons of water per day, which may not be a very easy task. Additional support was brought in from the Japanese police force to spray water from 50 meters at the reactor with mobile fire-fighting vehicles. In both cases, radiation levels had previously prevented the activation of such plans, but now the risk to public health is so great that the Japanese government is understandably sacrificing some members of the security forces. The legal limit for radiation exposure has been doubled in order to maintain workers at the facility pumping, spraying pouring water on the fuel rods.
Gold is up, yen is back near 79 per USD and stock prices are all higher around the world today as the market shakes itself out of the gloom and doom mood to wait and see mode for a while. Nonetheless, with turmoil in the Middle East ongoing, and Portugal`s rating downgraded by two notches yesterday, there is ample cause to keep the mood suppressed and prevent a breakout from taking place. At the same time, perhaps one positive consequence of all this mayhem from the point of view of the speculator will be a slowing of the pace of Chinese rate rises and counter-inflationary measures. Provided that the Japanese crisis can come to an end in the near future, and Ben Bernanke smiling, markets may have reasons to find the upside more attractive.
The French are boasting about having downed an airplane of the Libyan Air Force, and there are more worrying news coming Japan today, as if the Portuguese government`s fall were not enough to stress the trader community. Gold is appreciating along with oil and other commodities, but this should not be seen as anything other than a reflection of the general speculative trend that has been driving their prices up for quite some time.
As the week closes, the uncertainties that have so far failed to dampen speculative sentiment continue to undermine it, but the pressure will probably intensify as the aftermath of the Portuguese government`s fall becomes clearer to traders. We do not know yet how far the repercussions of this small nation`s difficulties will reach, nor do we know how likely it is that similar scenarios will play out in nations like Ireland, Spain or Italy. These problems will remain a fixture on the picture for months and indeed years to come, because they are too big to go away in short order and are always heavy in the minds of traders as a consequence of their central role in the big picture.
One should not expect the next leg of the sell-off, when and if it materializes, to significantly alter the mood or composure of traders, because all interest is on the Fed`s actions at the most basic level. The present weakness in the market will not last for very long, because the E.U. Authorities will intervene in the sovereign debt issue soon. The Libyan crisis is likewise very likely to turn into a chronic problem in a few weeks, and the Japanese issue will naturally calm down as the nuclear problem recedes from the headlines. The Fed`s determination to keep the markets afloat will thereafter surface as the main force behind trends, and it will likely be the dominant one.
The U.S. Dollar gained across the board against all other major currencies last week. The Greenback's strength was initially sparked off by the European financial crisis.
Nevertheless, the Dollar soon reacted even more strongly to increasing tensions between North and South Korea that prompted significant safe haven Dollar buying across the board.
Last Tuesday, financial markets were shaken by the unexpected artillery attack by North Korea on a small island known as Yeonpyeong in the Yellow Sea which belongs to South Korea. The attack resulted in four deaths, of which two were South Korean marines and two were civilians. Eighteen other people were wounded in the attack.
North Korea blamed the hostile action on South Korea holding artillery drills close to North Korea's maritime border, and it threatened that the country would be "merciless" if the South's military drills get too close to their border.
Earlier today, South Korean President Lee Myung-bak took responsibility for failing to protect the South Korean people from the North Korean attack. He also expressed outrage at the "ruthlessness of the North Korean regime".
Myung-bak added that, "I feel deeply responsible for failing to protect my people's lives and property." Furthermore, he went on to say that,
"If the North commits any additional provocations against the South, we will make sure that it pays a dear price without fail."
The South Korean president did not specify in his speech what measures the South Koreans plan to take in response to last week's attacks, with the exception of a promise to strengthen his country's military force.
Nevertheless, minutes after the conclusion of his speech, the North Koreans issued a threatening statement saying that the joint South Korean/ United States' military drills planned to take place this week were "yet another grave military provocation."
The recent increase in hostility between North and South Korea that began last week had an immediate effect on financial markets all over the world, with the forex market impact being primarily to drive the U.S. Dollar sharply higher on safe haven buying activity.
Nevertheless, the Greenback came off somewhat last Wednesday as Asian markets recovered some lost ground after the United Nations Command called to "deescalate the situation" and stop the "unprovoked attacks".
Ultimately, the U.S. Dollar finished last week considerably higher against the Euro, Sterling, the New Zealand Dollar and the Australian Dollar, while ending up moderately higher against the Japanese Yen and the Canadian Dollar.
The European currencies also suffered from the continuing European financial crisis of which Ireland was the latest Eurozone country to request bailout funds.
Despite its previous medium term decline, the U.S. Dollar's fortunes now seem to have reversed in the short term. Given the current momentum of this correction, it seems that the U.S. currency will probably continue gaining against most other major currencies - at least for the time being.
Nevertheless, it is still too early to tell how successful the results of the next round of QEII economic stimulus measures will be on the U.S. economy. Furthermore, the market is still understandably cautious about taking the Greenback much higher since QEII involves expanding the U.S. money supply by printing billions of new dollars - mostly to purchase existing Treasury bonds - which should eventually devalue the Dollar.
Furthermore, with the continuing weakness in the U.S. economy still being exacerbated by relatively high unemployment and a sluggish housing market, future gains for the Greenback will most likely be based on increased risk aversion or a flight to quality which could continued to lend some temporary support to the U.S. currency.
The Greenback's notable strength last week against the other major currencies was due in large part to the European financial crisis that was dealt yet another blow by the most recent Irish bailout request from the IMF and European Union.
Nevertheless, the financial markets cannot seem to stop themselves from worrying about yet another potential financial crisis, with the focus now shifting toward either Portugal or Spain to be the next financially troubled European country humbled into accepting bailout money.
Nevertheless, each successive bailout seems harder to get the approval of the more fiscally responsible Germans, who seem to feel that the bond holders should pay the price for buying high yield debt from the more financially troubled EU members.
The financial troubles in Europe added substantially to the U.S. Dollar's dramatic rise last week. The concerns initially solidified with the Irish financial crisis and then started spreading into worries over the financial situation of other European member states like Spain and Portugal.
The financial crisis in Ireland began causing concerns the previous week when a London clearing house - LCH.Clearnet - raised margins on Irish bonds to between 15 and 30 percent. By the end of the week, the Irish government had agreed to a joint EU/IMF bailout program, which is currently estimated to be between 80 and 100 Billion Euros.
Last Monday, Moody's Investor Services warned the markets that it might have to make a multiple notch downgrade for Irish debt. The rating agency noted that the rescue package from the EU and the IMF would, "crystallize more bank-contingent liabilities on the government balance sheet, and increase the Irish sovereign's debt burden."
The currency market basically interpreted this as a signal to buy U.S. Dollars against the other major currencies, especially other European currencies. As a result, the Euro declined by -3.3 percent last week, while the British Pounds lost -2.5 percent on the week.
The commodity currencies were also lower, with the New Zealand Dollar dropping a whopping -3.6 percent, while the Australian Dollar shed -2.2 percent. The Canadian Dollar - last week's best performer against the Greenback - dropped a mere -0.2 percent and was least affected by the financial crisis in Europe.
In addition to the Irish financial crisis, concerns arose over the financial position of other troubled members of the European Union such as Portugal - who is rumored to be the next troubled economy in line for a rescue package from the EU and IMF.
Earlier in the week, Portuguese Prime Minister José Sócrates stated that
"Portugal doesn't need anyone's help and will solve its own problems."
Sócrates also stated that Portugal had a clear strategy to bring down its massive deficit and that the Irish rescue had "no connection" to the situation in Portugal.
Spain was also mentioned as a bailout candidate, but it managed to sell 3.26B Euros in Treasury bills last week, although this was on the lower end of the estimated 3-4B Euros that the debt auction was expected to raise.
In Spain, Spanish Finance Minister Elena Salgado stated that,
"Spain is doing everything it has promised to do, with tangible results"
When asked whether Spain would need a bailout from the European Union, Salgado answered, "Absolutely not".
Despite the relatively optimistic comments made by Salgado and Socrates, Portuguese bonds surged last week to 6.9 percent. This pretty much mirrored the sharp yield rise that Greek and Irish bonds demonstrated just before going to the EU to request a bailout.
In addition, the spread between 10 year Spanish bonds and German Bunds hit a post EMU record of 233 basis points over the Bunds, achieving a yield of 4.87 percent on the Spanish bonds.
Nevertheless, according to some analysts, Spain is too big to bail out. They argue that the size of any meaningful rescue package for Spain is likely to use up all of the available EU funds.
Such a situation could seriously destabilize the European Union during this crisis period since Germany seems increasingly less supportive when it comes to bailing out less fiscally responsible EU countries.
