Lessons For This Week: Disturbing Developments From Japan, EU Part 1

Part 1: Top Market Movers: Daily Diary

Here’s the first of a two part article.

• Part 1: Top Market Movers: Daily Diary
• Part 2
  • Conclusions, Lessons From Last Week  For This Week And Beyond
  • Weekly Currency Dilution Alerts
  • A New Way To Help Save Your Local Currency

Top Market Movers: Daily Diary

MONDAY

The big market mover was political uncertainty in Spain and Italy, which sent markets down hard on renewed twitches of EU angst.

Asia

Leading stock indexes, our best overall risk appetite barometer, were mixed with modest up and down moves but overall higher on:

• Signs of recovery from Japan’s battered consumer electronics makers
• Expectations of continued JPY weakness and thus better growth for Japan
• China’s strong non-manufacturing PMI, a bullish sign that the world’s chief growth engine is finishing its slowdown of sub-8% GDP growth

Europe

Virtually all major indexes were down hard, 1-2.5%, and Spain’s indexes plunged nearly 4% on as a high market, vulnerable to any kind of negative news, got just the excuse it needed for the inevitable profit taking session. The big news of the day was that political uncertainty in the EU’s major debtor nations:

• Spain: A growing corruption scandal involving Spain’s Prime Minister Rajoy, including allegations that he and other party members took bribes. As we discuss below, the PM already has a record of outright lying that’s exceptional even by the standards of Spanish politics. However any political uncertainty, especially in Spain, is particularly upsetting for risk asset markets.

The EU won’t survive without a solvent Spain, and much of the reason for major global stock indexes being near all time highs is that the EU crisis is believed to have been stabilized. Anything that undermines that dubious assumption will be poison for risk assets world-wide, as the EU remains very much a solvency risk that could crash markets. See below in our conclusions section for more on that.

• Italy: Former Italian PM Berlusconi’s rise in recent polls threatens to return him to office. He was forced out when demand for Italian bonds and stocks plunged due to his perceived mismanagement of the economy. Markets don’t want him back. His campaign platform includes populist but irresponsible promises to revoke “German imposed” austerity policies, and revoke an unpopular property tax, whereas Brussels and markets want to see policies that will reduce Italy’s debt. Not surprisingly, yields on Italian benchmark 10 year notes moved higher to reflect the increased risk.

These developments sent the leading indexes, and EUR, down sharply. For all the recent bluster from EU leaders about the EU crisis being solved, the day’s events revealed the true fragility of market confidence.

US

US markets followed Europe sharply lower for their worst day of the year, for the exact same reasons. Analysts also followed their European counterparts, and saw the move as part of an inevitable temporary correction that should be viewed as (surprise!-not) a buying opportunity.

TUESDAY

Tuesday essentially saw a technical bounce on little news

WEDNESDAY

Asian indexes were up, and Japan soared 3.77%, on further hopes for a weaker yen and thus stronger exporter growth. This time the reason was news of the current BOJ head’s early exit. His replacement will be PM Abe’s man, which suggests that more stimulus could be coming sooner. That was the biggest headline of the day.

Helping the optimism was a report from Societe Generale, which said that Japan would win any “race to debase,” (aka currency war) because it’s the only Asian nation where a weaker currency boosts stocks because Japan’s stocks move with the fortunes of exporters. Other Asian nations’ stock markets move with capital flows, and so weakened currencies could spark stock selloffs in those nations.

European indexes finished mixed due to pressure from a combination of factors, including:

• Continued political uncertainty about Spain and Italy: That instability could complicate keeping confidence in their creditworthiness up (and thus yields low).

• A series of weak corporate earnings reports

• An open disagreement between France and Germany on whether to join the currency wars and weaken the EUR.  France wants a weaker, Euro, Germany doesn’t, saying that the EZ’s path to recovery is via “strengthening competitiveness rather than weakening currency.”

US markets closed flat, and lacked any clear market mover.

THURSDAY

Asia closed mixed, with Japan down almost 1%, surrendering much of Wednesday’s gains on profit taking due to a combination of relative JPY strength and caution ahead of the ECB meeting later that day.

European indexes and risk asset markets were all down solidly 0.5 – 1% or more after ECB President Draghi’s downbeat comments on economic weakness in the EU.

A Spanish bond auction showed Spain’s borrowing costs rising, however it was not mentioned as a market moving event in the mainstream financial press. See below for more on that.

That was the only really significant market moving news of the day. Disappointing earnings results from drug Giant Sanofi didn’t help either.

Traders remain complacent about EU risks, and see the recent pullback as just a normal technical correction, with weak earnings, a major corruption scandal that could unseat Spain’s PM, and the threat of anti-market boogieman Berlusconi returning to power as just excuses for a selloff that was bound to happen.

US markets closed modestly lower on minor profit taking due to a combination of follow through from European weakness and weak data.

FRIDAY

Asia closed mostly higher, aided by positive China data, but Japan was down almost 1% on some profit taking spurred by EU events noted above, and aided by disappointing current account data, which showed it has the smallest current account surplus since 1985. While it got little play in the press, this is a very disturbing sign for reasons we discuss in the conclusions section below.

European indexes soared on a combination of upbeat Chinese and US data, and an agreement that removed some uncertainty regarding the EU’s long term spending plans. It introduced the first spending cuts ever to the 2014-20 budget.

Please proceed to part 2 for conclusions and lessons for this week and beyond.

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DISCLOSURE /DISCLAIMER: THE ABOVE IS FOR INFORMATIONAL PURPOSES ONLY, RESPONSIBILITY FOR ALL TRADING OR INVESTING DECISIONS LIES SOLELY WITH THE READER.