WE CAN’T TELL HOW BAD IT IS GOING TO GET

 
David Morris
CFD MARKET STRATEGIST, GFT

The tragic consequences of the earthquake and tsunami that hit Japan over a week ago continue to reverberate, with the terrible human cost now becoming apparent. The situation has been made much worse by the uncertainty that surrounds the severity of the damage to the Fukushima nuclear facility. The initial panic saw the Nikkei drop around 20 per cent in less than 48 hours. Prices have recovered somewhat, and many analysts have been quick to declare that the sell-off was overdone.

As things stand, we just don’t know how bad things are, let alone how bad they could become. Most expert opinion has insisted that any contamination from the damaged plant would be limited to a 30 kilometre zone around the site. However, increased levels of radiation have been detected in food and water outside this area. While not high enough to be a risk to humans, it is still a concern. Any resulting loss of confidence will further dampen economic activity in the area. Meanwhile, rescue workers continue to risk their lives each day as they fight to regain control of the six reactors.

On top of the escalating hostilities across north Africa and the Middle East, the European debt crisis continues to rumble on. The problems in the world’s largest economic bloc have fallen under the radar in recent weeks despite a constant drip of negative news. Yet the euro has rallied strongly, helped by the ECB after it gave its strongest possible hint that a rate rise is on its way at its next meeting in April. Of course, this will do nothing to help the heavily-indebted peripheral countries which have all seen their bond yields push higher. In the last ten days, ratings agency Moody’s downgraded the sovereign debt of Greece, Spain and Portugal.

Equities are showing the strain. After hitting multi-year highs just a few weeks ago, most of the major global indices had begun to pull back. Investors were reducing their exposure as unrest across north Africa and the Middle East pushed oil prices above $100 per barrel. But the events in Japan led to a sell-off that saw stock indices crashing through significant technical support levels. Equities have bounced back over the last few days. But they now need to consolidate and build on these gains or a much deeper correction is on the cards.