March 15th, 2011 7:47 PM by Lehel S.
The potential of a nuke meltdown increased overnight sending all investors running to cash.The Tokyo stock market with the Nikkei 225 (NKY) index posting its biggest two-day drop since 1987, while commodities slid and Treasuries jumped. Europe's equity markets all lower, in the US in pre-market trade at 8:30 had the DJIA down 278, crude oil down $3.85 and gold off $30.00. Conflicting reports that are steaming moment to moment out of Japan; earlier last night the Prime Minister was cautioning that a meltdown was increasing quickly, asking people to leave the area, tape up windows and/or stay inside. At 8:30 this morning Tokyo Electric Power Co. engineers at a nuclear plant restored water to safe levels, helping drive down radiation after residents within 30 kilometers (19 miles) were ordered inside to avoid contamination. “The radiation levels are above normal, but at most only about one-10th of a chest X-ray and are not harmful to the health,” the government said in a separate statement today.
Whether or not there will be a serious meltdown is an obvious concern but markets are beginning to realize that Japan's economy will be impaired for years in the process of re-building. The impact of one of the largest economies in the world being dragged down is still not fully understood by markets or the Fed. The Fed is meeting today in the scheduled FOMC meeting, talk already about the potential of another easing move resulting from the crisis. The Bank of Japan infused $183B into the financial system yesterday and another $83B today to support the system.
Yesterday the US markets appeared to have not taken the Japanese situation as seriously as we would have thought; the DJIA fell just 51 points while the Treasuries and mortgages hardly moved. Today with increased fears of a nuclear meltdown all markets are being impacted. Crude oil continues to fall on the idea that Japan's need for oil will decline as its economy grinds to almost a halt. Longer term however, crude will eventually increase as markets realize Japan won't have nuclear power for years to come. Gold also is declining, no one wants to hold anything but cash now; all commodities are lower this morning. The news out of Japan is conflicting, there is little understanding now as to the eventual impact for the global economies; today it is a run to cover many market positions.
More not so good news; German investor confidence unexpectedly fell for the first time in five months in March. Its confidence index of investor and analyst expectations, which aims to predict developments six months in advance, declined to 14.1 from 15.7 in February. Economists had expected a gain to 15.9.
The troubles in the Mideast have been put in the back seat with Japan now the main focus; nevertheless things are not improving in the region. Troops from the Gulf Cooperation Council, including Saudi Arabia, crossed into Bahrain yesterday, the first cross-border intervention since a wave of popular uprisings swept through parts of the Arab world. Shiite protesters and Bahraini forces escalated Sunday, with more than 100 people injured as demonstrators demanded democracy through elections from their Sunni monarch.
Economic news here in the US this morning has been pushed to the side; the Mar NY Empire State manufacturing data this morning at 8:30 showed the overall index up to 17.5 frm 15.43, a little better than expected but with Japan it is already out-dated news. The sub components; new orders fell to an index read of 5.81 frm 11.80 in Feb, the employment component increased to 9.09 frm 3.61 and prices pd for materials increased to 53.25 from 45.78 (any index read over zero is considered expansion.
At 10:00 the Mar NAHB housing market index hit at 17, up 1 point from the past five months and was as expected.
Later this afternoon the FOMC meeting will conclude with the usual short policy statement. The Fed is unlikely to have much comment in the statement regarding the current economic crisis that is escalating out of Japan. Expect a lot of debate in the coming days over whether or not the Fed may have to initiate another easing move of some kind. It is too soon for any definitive decisions, the Fed will wait for more news and analysis on the impact on the US economy before committing to any additional easing.
Everything happening now in the world is supportive to US treasuries and therefore mortgage markets. Early this morning the 10 yr note yield fell to 3.23% down from 3.37% at the close yesterday. By 9:30 the 10 yr rate had increased to 3.26%. The equity markets are trading lower today with investors and traders scrambling to market neutral positions or simply selling. Yesterday the equity market opened soft with the DJIA off 140 points but by the end of the session the DJIA ended down just 51 points; today may be a lot different pending continual news coming out of Japan on their nuke problem. This morning the DJIA opened down 185, the 10 yr +30/32 at 3.26% -11 bp and mortgage prices up 19/32 (.59 bp); within five minutes of the open the DJIA traded down 293 on a news flash Japan suffered another 6.0 earthquake.
It is all happening rapidly this morning, no one wants to wait to see facts, the markets are highly volatile and emotional at the beginning of the day. Today may be exceptionally volatile as the news unfolds. Already in the first 30 minutes of trading in equities the indexes are well off their lows and the bond and mortgage markets have backed off their best levels so far.