Markets face a huge test of sentiment today, despite America’s small rally on Friday night after the record Japanese earthquake.
A big early fall on our stockmarket is certain after Nikkei futures fell 5% in after market trading in Europe and the US, on top of the 1.7% fall in the Nikkei in actual trading.
The quake hit at 2.46 pm Japan time, just before trading finished, the tsunamis caused more damage after the close.
The Australian dollar, finished up at 101.4 US cents on Saturday morning, 72.9 euro cents, 63.1 pence and 83.1 yen.
Australia’s SPI share futures were up 8 points to 4639. But that was before the news about the extent of the damage and the damage to the two nuclear reactors became known.
Other markets in Asia will lurch downwards as well; Australia and NZ will be the first to take the strain.
Asian markets fell in late trading Friday afternoon and evening as the quake came to overshadow the escalating violence in Libya, and another high reading for Chinese inflation, all of which have combined jolted confidence in the global economic recovery.
But all eyes will be on Tokyo where the Tokyo Stock Exchange plans to open for trading as normal later this morning and the Bank of Japan holds its usual monthly meeting today instead of tomorrow, and will issue a special statement later today at the end of discussions.
The central bank says it will do everything to provide liquidity to the economy today.
It also confirmed that its settlement system was working and that it was able to settle all accounts without disruption.
Partly offsetting that bad news was the deal on Saturday that may have set Europe’s debt woes on the path to some sort of rational solution.
The leaders of the heads of the eurozone’s 17 countries agreed unexpectedly to help the debt laden countries such as Greece, Portugal and Ireland by strengthening the 400 billion euro bailout fund and lowering the interest rates on Greece’s bail-out loans.
The leaders also backed a plan to use the rescue fund to buy sovereign bonds of struggling governments when they are initially auctioned, a move that could allow countries with high borrowing costs to raise cash at much lower yields. But they would first have to agree to an austerity budget and huge spending cuts.
Ireland was not accommodated as the new government rejected French-German pressure to boost its corporate tax rate from 12.5% in exchange for a 1% cut in it’s bailout’s interest rate. Greece agreed after committing itself to 50 billion in asset sales.
The news could help steady nervous European markets ahead of the bigger two day summit next week.
Then again Ireland could sink it by pushing to impose losses on private sector creditors, which would raise the spectre of default and threaten the stability of the euro.
As well as this story, markets were also worried by another high inflation report from China for February.
The 4.9% reading was unchanged from January (which was up from December’s 4.6%). US and some European analysts mistakenly used the weaker exports and trade deficit news for February, and the latest inflation report, to claim that China was slowing and possibly pointing to a dip in global consumption.
But February was influenced by the Spring festival/Lunar new Year holidays). Industrial production was up 14% in January and February (which are combined to offset the impact of the holidays which occur in either January or February each year).
The oil price rise and crisis in Libya also remain as negatives for sentiment, and already we have seen a 10% fall in copper prices from a month ago as oil prices have escalated (but oil fell around 3% last week and grains tumbled by between 4% and 14% as well).
Now the question for investors is to what extent the earthquake in Japan will disrupt global economic activity, and whether the other factors mentioned above are now adequately discounted by the market.
The answer is that the Japanese quake won’t have much of an impact unless the current nuclear power station problems worsen significantly.
That could become a genuine environmental and financial disaster.
It is being compared to Chernobyl happened in Russia in 1986, but the fallout was a major dislocation across much of Europe.
Japan is a very different situation given it’s in the west and the world’s third largest economy.
At worst it could cause significant power shortages and enormous financial costs that the government will have to meet
In New York on Friday, the Dow rose 60 points, or 0.5%, the S&P 500 rose 9 points, or 0.7%, and the Nasdaq Composite added 15 points, or 0.5%
Despite the gain, for the week, the Dow and S&P 500 fell more than 1%, while the Nasdaq sank almost 2.5%.
European stocks stumbled Friday and finished at two year lows.
Britain’s FTSE 100 fell 0.3%, the DAX in Germany lost about 1.1% and France’s CAC 40 dropped 0.9%.
The Footsie was down 2.7% for the week and other markets also had solid falls as the Middle Eastern concerns and the renewed debt doubts in Europe hit confidence.
In Asia, the quake and tsunami were just too much bad news for some markets on Friday and they ended lower Friday.
The Shanghai Composite sank 0.8%, the Hang Seng in Hong Kong declined 1.5% a
