INDICES RISE BUT SO DOES UNCERTAINTY

 
David Morris
CFD MARKET STRATEGIST, GFT

IT HAS been just over two weeks since Japan was hit by a devastating earthquake and tsunami, yet most major stock indices are already trading back at pre-crisis levels. This is despite the huge reconstruction costs faced by the country which have been estimated to be anywhere between 4 and 16 per cent of Japan’s GDP. While many economists see this as positive for growth, it will increase the country’s huge public debt burden. Estimating the cost of the tragedy is made far more difficult by the uncertainty concerning the existing danger and future disruption posed by the damaged Fukushima nuclear facility.

Meanwhile, there are more problems in the Eurozone following the collapse of the Portuguese government last week and on talk that Ireland is considering haircuts for senior bondholders in Irish banks. Last week’s EU summit saw further indecision and prevarication, as politicians failed to fully address the debt crisis, fearful of the backlash from their constituents. This is already happening, as Angela Merkel and Nicolas Sarkozy saw their respective parties lose regional elections at the weekend.

The conflict in Libya continues, although it is looking increasingly likely that the country’s oil infrastructure will be left undamaged. However, tensions continue to rise across the Middle East with escalating violence being reported in Yemen and now Syria. This has seen oil prices return to elevated levels with WTI joining Brent above $100 per barrel. Following statements from Libya, Iran and Venezuela earlier this year, other Opec members now appear to be quite relaxed at the prospect of oil at $120 or beyond. The question is how well the global economy can cope with higher prices. If oil gets stuck at current levels for the next few months then corporate profit margins will suffer. Thanks to a mixture of stubbornly high unemployment and a housing slump in the US, with continuing austerity measures in the UK and Europe, companies will struggle to pass on rising commodity and fuel costs.

We’ll get more of an idea of how companies have already been affected once the first quarter earnings season kicks off in early April. But as long as the US Fed continues to goose the economy with its asset purchases, investors still seem happy to “buy the dips”.