MONTREAL - The Nikkei 225, the most-watched Asian index in North America, has
along with other regional benchmarks been in a volatile holding pattern for the
past week, held hostage to news of a US recession. This cannot go on.
US markets often follow the Nikkei up or down if the movement is confirmed in
the meantime by European equities markets, which open after Japan closes and
close after New York opens. Yet the Nikkei's movements are frequently
themselves a response to
American macroeconomic data - such as pointers to a recession.
On February 4, for example, the Nikkei 225 index was down 4% led lower by
consumer-goods exporters to the American market. After it led world markets
lower at the beginning of the week of January 21, the Nikkei has vacillated in
a range of roughly 12,600 to 13,800, for which there is no real technical
support aside from a brief intermediate high in mid-October 2005.
Traders in the Far East are waiting to see the performance of the American
averages, which are near either the bottom of a new trading range or a new
intermediate low. For the Standard & Poor's 500 average, the key level is
1326.
A bit of recent history helps to establish this connection. January 22 was the
Tuesday of the extraordinary Federal Reserve three-quarter-point rate cut
before market-open. It followed a Monday holiday in the US that was strongly
down in East Asia and Europe, where markets were open. Since markets close on
Tuesday in Asia before they open on Tuesday in New York, the Nikkei 225 had had
two sessions over the long American weekend. For those two sessions, it was
down 8% (or 9.5% including the previous Friday, January 18).
The Fed, faced with a futures market indicating that the main US indexes would
begin catching up with the Nikkei, down their maximum collar (at the bottom of
their permitted range against the index's current value) and dropping like a
rock, then made its move. That day the S&P500 closed at 1310, rising to
1396 on February 4 (there is a technical resistance at 1403) before falling to
the 1326 support around which it closed on February 5, 6 and 7. This does not
definitively mark a bottom because the volume was unimpressive, indeed just
short of anemic.
The Hang Seng Index in Hong Kong has not been as lucky as the Nikkei, although
since the crisis was averted on January 22, it too has been in a range (between
about 24,000 and 25,000) but with extreme day-to-day volatility. Other East
Asian exchanges have more or less tracked the Hang Seng, including the South
Korean KOSPI Composite and the Taiwan TSEC Weighted Index.
The Nikkei 225 has also been a sort of benchmark for tracking even India's BSE
Sensex 30 (reflecting trade in Mumbai, which often has its own dynamic,
although often with less volatility than East Asian markets) as well as the
Australian All Ordinaries (although the latter, with typically greater
volatility and slightly better performance).
The only reason why American shares did not fall further this week (through the
Thursday of this writing) and seek to move downward out of the 1326-1403 range,
is that there were no absolutely disastrous earnings reports on which to fixate
attention. Even a Fed Board member's public remarks that interest rates could
not be cut forever because of the danger of inflation, was not enough to rattle
traders.
Indeed, the publication of further discouraging data on the US economy did not
prevent a minor recovery of shares in the retail and financial sectors, due
mainly to earnings reports. This reversed a three-day Wall Street decline, and
as a result European shares are expected to open up on Friday, February 8,
rebounding off their own technical support levels, following Wall Street's
pattern so far this week.
Short-term patterns indicate the attempt to establish a trading range in Europe
as well as New York (and Toronto, but for different reasons). However, further
bad news of the liquidity crisis in the banking sector may challenge this
trading range on the bottom side in the medium term, if not sooner.
An adverse response to that news in Asia would do nothing to dampen the
reaction in European and American markets. The development of the macroeconomic
situation and decisions of central bankers will play key roles in determining
the evolution of the markets in such a case.
R M Cutler is a Canadian international affairs analyst who may be found
at http://www.robertcutler.org
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