Equity markets – a tumble on Wall Street, US evacuates citizens from Japan

Helicopters sprinkling a power plant in a desperate attempt to cool reactors cannot herald anything positive and investors took this point seriously. Furthermore, worldwide warnings that things could only get worse and a strong advice from the US authorities to citizens to leave Japan (something which recently affected countries like Egypt or Libya) caused a serious fear among US investors. Probably, and perhaps importantly, for the first time. One should notice, that so far major losses took place during the Asian and European trade with those losses being recovered during the US trade. This time the major hit was taken during the Wall Street cash trading and actually some relief took place in Asia. This shift in sentiment might herald a prolonged correction. At the moment we see supports of 1224 pts. for S&P500 futures and 6355 pts. for the DAX30 futures as some possibly good turnaround points.

USDJPY – sharp gains on yen and franc, Aussie and emergings roiling

We pointed out on Monday (lessons from Kobe comment) that new lows on the USDJPY in the near term were likely. Indeed, investors took advantage of a moderate liquidity at the end of the US trade to test previous historical lows of 79,75 and were successful. Some major stop losses below that level triggered a massive sell-off and brought the pair to as low as 76,57 yesterday. The pair bounced back during the Asian trade but was still around 79 at the European opening.

We stick to our view that in a short term market may try to push the pair lower, although a repeat of ’95 when the pair slid more than 20% in the aftermath of the catastrophe is extremely unlikely. We also think that a turnaround in a couple of weeks (probably helped first by the BoJ and then by the talks of phasing out the QE2 in the US) is very likely as the Japanese economy will need a weaker, not a stronger currency to regain lost ground.  

While the market is focused on the USDJPY, there were even larger swings on some other pairs. Basically the yen and franc were gaining while Aussie, Kiwi and emergings (peso, rand, zloty) were losing ground. So actually some major moves took place on pairs like AUDJPY or NZDJPY.

Events to watch – US CPI, output and claims

There is quite a bundle of the US data today with the CPI release (8.30 ET, 13.30 CET, consensus +0,4% m/m, +0,1% m/m for the core) definitely on top and claims (8.30 ET, consensus 384k), output (9.15 ET, consensus +0,6% m/m) and the Philly Fed (10.00 ET, consensus 30 pts.) filling up the picture. However, keeping in mind nearly no reaction to some massive surprises yesterday (literally a leap in PPI at 1,6% m/m and a tumble in starts and permits – not really a nice combo) it is uncertain if CPI data can move the markets today, let alone remaining releases. Fukushima plant is in the central stage and is likely to remain there for a while.   

Przemysław Kwiecień PhD, Chief Economist

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