March 16, 2011

Japan Stocks Rebound; European Markets Feel Portugal Rating Cut

Investors snap up bargains on Nikkei; Moody’s lowers Portugal’s rating

The Nikkei recovered some lost territory on Wednesday as markets in Europe felt the pain of local problems amidst the turmoil over Japan’s tragedy. Moody’s Investors Service cut Portugal’s rating by two notches to A3, and markets in Europe reacted, with bank stocks limiting a rise caused by bargain-hunting buyers and in the end weighing heavily on the finish.

The Nikkei bounced back from two days of massive losses to regain some 5.68% at its close of 9,093.72, and TOPIX was up 6.64% to 817.63. In its continuing efforts to calm the markets, the Japanese central bank injected $43 billion more in liquidity into the economy.

Reuters reported that the FTSE regained some of its own losses thanks to investors taking a breather from the panic selling on Tuesday, spurred by nuclear meltdown fears, that chopped almost 21 billion pounds ($33.86 billion) from the market. Banks, however, limited the upside of that recovery, with the news of Portugal’s lower status serving as a grim reminder of problems closer to home.

Early trading saw the FTSE 100 up 5.16 points at 5,700.44 after five consecutive down days, but banks shaved 12 points from the index on Portugal’s news. But midday, stocks felt pressure as the FTSEurofirst 300 index of top shares lost 0.5% at 1,079.25 points, after a 3½-month low finish on Tuesday. The STOXX Europe 600 Banks fell 1.5%; STOXX Europe 600 Technology index dropped 0.3%; the FTSE 100 fell 0.7%, Germany's DAX was down 0.3%, and France's CAC 40 lost 0.8%.

Brent crude injected another note of reality, gaining more than $2 to rise above $110.50 per barrel around midday. U.S.crude futures also rose around the same time, adding $1.37 to reach $98.55 per barrel as concerns over events in Bahrain began to weigh heavily on Saudi Arabia.

Oil prices have not yet added a premium for an expected increase in demand from Japan; that may be a while in coming. However, barring a drastic development in alternative energy sources, it is to be expected, since Japan’s reactors damaged in the earthquake are likely beyond repair and will force the country back to a reliance on other conventional sources of energy as it works to rebuild.

Gold also saw renewed demand, regaining lost territory from Tuesday as investors saw a chance to buy on the dip. Opposing forces are working on gold: a thirst for liquidity, spurred by nuclear worries in Japan, and the need for safe havens, egged on by events in the Middle East/North Africa (MENA) region. Gold had lost 2.3% in Tuesday’s trading, its biggest one-day drop since January, but Wednesday the flight to safe havens over liquidity prevailed and spot gold was bid at $1,398.44 per ounce against New York’s Tuesday close of $1,393.95, and U.S. April gold futures gained $5.80 to $1,398.60.

Barclays Capital said in a note, "The twin shocks of Middle Eastern political uprisings and the largest earthquake ever to hit Japan have increased downside risks to global growth and metals prices in the short term. Until there is more clarity on these events and how policymakers will respond to inflationary pressures, prices of growth-sensitive assets ... will likely struggle, while safe havens, such as gold, should outperform."

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