Japan Quake Setting Off Market Aftershocks

by Attain Capital

Unless you’ve been hiding under a rock all weekend, you all know the news out of Japan. While initial reports indicated that the nuclear facilities in range had been secured in time to prevent any major damage, subsequent explosions on site have caused near panic as news of radioactive leaks have spread. No one knows yet just how substantial the damage will be to the world’s 3^rd largest economy, which is among the world’s leading importers of Oil, Corn, and Cattle, but the Nikkei stock index down -7% since the quake can give you and idea.

The last time Japan (and the rest of the world) was affected by an earthquake anywhere close to this magnitude was the Kobe quake of 1995, and that was only a 7.2. Thus far, the markets are following a relatively similar path to that time period, with the Nikkei Index dropping 6.2% already today (WSJ).

In 1995, Nikkei dropped 7.99% within four days of the quake. We’re only on the third day of trading since the 2011 quake, and it’s dropped 7.81% – taking most global stock markets with them (not to mention commodities like Platinum which are used in Japanese car production).  If you weren’t listening last week when we said it was time to diversify, you might want to now.

How this will play out over the next several months is anyone’s guess.  In looking at the moves in Japan’s largest import markets of Oil, Corn, and Cattle in the months of demand disruption after the Kobe quake, we can see there wasn’t a clear cut ‘trade’ to be put on. This is due to several factors, the largest of which is that even the world’s third largest economy (2^nd largest at the time of the Kobe quake) having a hiccup isn’t enough to overcome other factors such as supply, interest rates, and more.

But this demand disruption looks to be on a larger scale – and comes at a time when other market currents are going the other way. On one hand, violence in the Middle East and inflationary pressures due to quantitative easing have been driving commodity futures higher and higher.  On the other, the earthquake affecting the world’s third largest economy can drop demand (causing for lower prices) for things like oil, platinum and corn in the face of lowered production capabilities. For today at least, the quake is winning.

See the original article >>