MONTREAL - Asian equity markets,
which started the week in a mood of trepidation,
followed the North American markets' reaction to
world financial developments. They thus tracked
the hopes and fears of the international credit
markets, conditioned by the realization that the
February 9 Tokyo meeting of Group of Seven (G-7)
countries' finance chiefs only confirmed their
inability to coordinate national fiscal policies
and their unwillingness to do anything about
exchange rates.
The markets' evolution
during this period began on the downside amid
trepidation over the financial sector coupled with
increasing prices for oil and metal. They then
hemmed and hawed for a few days. In contrast to
the previous week, however, neither euphoria nor
dysphoria in East Asia had knock-on effects
rippling across
the
globe through Europe back to the United States and
Canada.
Mainly unchanged through
Wednesday, the Asian markets were up strongly on
Thursday, February 14, as the Nikkei 225 had its
biggest daily percentage spurt in six years. The
Hang Seng gained 3.7%, and Chinese exchanges were
up as well. The Thursday rise in Asia was driven
partly by the psychological impact of Warren
Buffett's Wednesday announcement of his
willingness to assume the risk from the tax-free
municipal part (US$800 billion) of the portfolios
of the three major bond insurers - Ambac, MBIA and
FGIC - for a 50% additional charge above their
premiums.
It was almost immediately clear,
however, that tax-free municipals are the only
instruments preventing these bond insurers from
sinking irretrievably under the quicksand of
subprime mortgage debt.
Buffett's gesture
was akin to an offer to snatch away the only rope
that could possibly save them. So by midday Friday
the main exchanges worldwide had lost over half
their Thursday gains, particularly following Wall
Street's downturn in response to Federal Reserve
chairman Ben Bernanke's Congressional testimony,
in which he warned of the danger of the US
entering a period of stagflation (low growth
combined with inflation).
Bernanke also
warned that, given his expectation of "sluggish
growth [over the next six to nine months],
followed by a somewhat stronger pace of growth"
towards the end of the year, he thought that the
Fed would be less aggressive in subsequent rate
cuts. Nevertheless, futures traders are still
expecting the current rate of 3.0% to undergo at
least another half-point cut on March 18, with
even a another three-quarters-point cut possible,
and with further cuts bringing the rate to 2.0% by
summer.
A good question, if this
expectation persists, is whether Bernanke and the
Fed will follow expectations. They seem to have
noticed that the quarter-point cut last October
31, in the face of half-point expectations,
engendered an immediate and precipitous decline
into the trading ranges that the main indexes now
inhabit. And it was that drop which conditioned
the psychology making the extraordinary
three-quarters-point cut necessary on January 22.
If the markets remain in their current
trading ranges for the next month, and if
expectations inferred from futures markets do not
change over that time, then anything less than
another half-point cut could produce a dive
through the floor of the current trading ranges in
search of new lows. This purely technical and
psychological danger will find a basis in world
market fundamentals if for any reason more bad
news about the international financial sector's
liquidity crisis comes out at the wrong time.
Unfortunately, we can be fairly certain
that some bad news will be coming out
periodically, since the subprime crisis still
requires months to unwind. Macro-economic
indicators will not save market sentiment in the
meantime, even if Asian production for the Asian
market does not flag, and China and India continue
their spectacular growth. A revaluation of the
yuan is not in the cards, but an announcement of
larger permitted fluctuations against the dollar
could have a short-term positive psychological
effect in summer.
Returning to this past
week, the Australian All Ordinaries index (tracked
closely by the other major Australian index, the
S&P/ASX 200) showed typically greater
volatility yet has not visibly responded to
increasing indications that the Australian dollar
might turn around against the American currency
due to the strength of the country's primary
materials sector and unflagging demand from East
Asia for these goods. On the other hand, due
mainly to metals and oils, the Toronto S&P/TSX
Composite continues its outperformance of Wall
Street and many European markets.
Indeed
the Canadian markets, because of the heavy
primary-materials weighting, have in the recent
short term significantly outperformed not only the
Australian exchange and Wall Street, but also the
Shanghai SSE Composite, which it had lagged for
most of the last six months, until the last three
weeks. The financial sector in Canada still has
its problems but these appear to have been shaken
out faster than in the US and Europe, due partly
to the smaller number of players, relatively less
subprime exposure, and a genuine effort (even if
not yet wholly successful) at transparency after
the initial writedowns.
The important BSE
Sensex 30 index in Mumbai has been holding onto
much of the exuberant relative gain it registered
last autumn but has begun again to track the other
Asian indexes in percentage terms, opening down,
in sympathy with them, 2% on Friday after an
almost 5% gain Thursday but immediately beginning
to recover towards its Thursday close, as the
Nikkei closed Friday near its own open. The Indian
index bears watching, as recent fluctuations
suggest it may become a leading short-term or
medium-term indicator for other Asian, especially
East Asian, exchanges.
R M
Cutler is a Canadian international affairs
analyst.
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