Wall St extends losses after Japan comments

ByJamie Chisholm, Global Markets Commentator

Wednesday 16.45 GMT. Wall Street is down more than 2 per cent at new lows for the session, after European stocks closed lower for the sixth straight day, while the Japanese yen is at its strongest level in nearly 16 years versus the dollar.

Risk aversion has flared after the European Union’s energy chief said the Japan nuclear reactor situation was “out of control”, triggering renewed fears over the world’s third-biggest economy.

Traders quickly realised that the statement by Guenther Oettinger was not predicated on any new information relating to the conditions at the stricken Fukushima plant. But the swift dip in risk appetite is testament to the extreme nervousness stalking markets as investors scramble to assess the impact of Japan’s crisis on global assets.

The S&P 500 in New York is down 2.2 per cent at 1,253.60 and has slipped below a support level at 1,262 and has turned negative for the year to date. The Vix volatility index has jumped 19 per cent to 29, its highest since July.

A report on the US housing market, which pointed to a sector still struggling to get off its knees, is not helping sentiment.

Oil has lost a chunk of its gains, while key US Treasury yields have fallen to levels last seen in December. The Swiss franc has risen 1 per cent versus the dollar and is up nearly 2 per cent against the euro as traders again scramble for perceived havens.

In Europe, the FTSE Eurofirst 300 closed down 1.6 per cent, with technology investors appearing less sanguine than their Asian peers about prospects for the sector given the turmoil in Japan. The FTSE Eurofirst electronic and equipment sector lost 3.1 per cent.

Trading Post
Just a few days ago, the final reading of February eurozone inflation published on Wednesday would have been used as confirmation of an April interest rate rise in the currency bloc. Not now. The market thinks it can hear the crunch of gears as European Central Bank president Jean-Claude Trichet is forced to reverse his “strong vigilance” mantra – code for an imminent rise – in the wake of the catastrophe in Japan. Two-year German Bund yields had pulled back sharply over the past three sessions as traders discounted the economic impact of Japan’s travails. Tuesday’s ZEW survey of German investor confidence shows how quickly such crises can affect sentiment: falling unexpectedly as those who responded after Friday’s earthquake expressed a pessimistic bent. As the chart shows, the euro has rallied on hopes for improved interest-rate differentials versus the dollar. It also got a boost after eurozone ministers at the weekend delivered a well-received tweaking of the peripherals’ bail-out system. But with the dollar on Tuesday showing signs of rediscovering its haven cachet, a lack of ECB tightening could leave the euro exposed. It is currently down 0.5 per cent to $1.3923.

London’s FTSE 100 shed 1.7 per cent and Germany’s Dax, which was earlier up 1 per cent, gave up 2 per cent. The FTSE All World index is down 0.5 per cent.

The latest stumble, which began at 14:50 GMT, stands in contrast to the sentiment inherited overnight from Asia, where the Tokyo stock market rallied almost 6 per cent in the belief that recent selling had been overdone.

“Bargain hunters” had moved back into many riskier assets in the region following a two-session tumble on Japanese nuclear fallout fears that had seen global equities shed about $1,600bn, according to Bloomberg data.

The Nikkei 225 bounced 5.7 per cent, partially reversing Tuesday’s 11 per cent plunge – the benchmark’s third-biggest drop in history.

This helped the FTSE Asia Pacific index gain 3 per cent and calmed the mood across the region, with Shanghai rising 1.2 per cent, Hong Kong adding 0.1 per cent, Sydney gaining 0.7 per cent and Seoul advancing 1.8 per cent.

Technology stocks in particular were stronger, as investors reassessed fears that a disruption to component supplies from Japan could delay production.

Hope that the underlying global economic fundamentals remain sound enabled some traders to argue that, provided the situation in Japan does not deteriorate further, recent declines in stocks and commodities offer a buying opportunity.

News of a rebound in the Conference Board’s leading indicator of China’s economy, released earlier on Wednesday, was seen as supporting this thesis.

But some cynics described the rebound as merely a short covering exercise, as traders bought back profitmaking negative strategies.

And as the European session progressed, traders were already becoming skittish as they were reminded of the unstable situation in north Africa and the Middle East, with news of fresh disturbances in Bahrain again pushing the oil price higher.

Forex – The yen is attempting to breach its record high from April 1995 of Y79.70 versus the dollar as traders continue to bet that the Japanese unit is likely to see buying from the repatriation of funds. The yen is up 0.9 per cent against the buck at Y80 and up 1.7 per cent versus the euro to Y111.03.

The dollar index is up 0.5 per cent to 76.73. Commodity-linked currencies such as the Aussie dollar that were badly hit on Tuesday and made good ground early in the day have subsequently relapsed.

Sterling has been hit by selling and is down 0.5 per cent against the dollar at $1.5991 as risk aversion trumps better than expected UK jobs data.

Rates – Japanese 10-year bond yields are flat at 1.21 per cent, even as the more apocalyptic growth scenarios were reined in during Tokyo trading.

US benchmark yields fell sharply to their lowest since December. The yield on 10-year notes dropped to 3.15 per cent and has eased slightly to 3.18 per cent, down 15 basis points on the session. The benchmark yield is below the key level of 3.25 per cent as risk aversion remains high, offsetting concerns over Japanese selling of US Treasuries.

German Bunds are down 5 bps to 3.09 per cent.

Portugal’s 10-year yields are up 2 basis points to 7.25 per cent after a €1bn sale of 12-month notes required a higher yield than previous auctions. The government in Lisbon, which received a credit rating downgrade by Moody’s on Tuesday, said that it might need a bail-out if the opposition did not back its austerity plan.

Commodities – News of deaths during an operation to clear a protesters’ blockade in Bahrain has helped remind traders that as worries recede over a Japan-induced demand contraction, there are still Middle East supply concerns to deal with. Brent crude is up 2.3 per cent to $111.05 a barrel, after an earlier rise of 3 per cent to $112.

Industrial metal prices are trying to hold on to their early gains. Gold has slipped back below $1,400 an ounce. Agricultural products, which got spanked on Tuesday, are mostly higher.