MARKET RAP What goes up must come down
By R M Cutler
MONTREAL - Asian markets rallied this week following the 0.75% interest rate
cut by the US Federal Reserve on Tuesday, but many of them lost at least some
of those gains on Thursday following Wall Street's retracement. The
resource-heavy Australian exchange in particular gave up all the gains on
Shanghai was also an exception: it did not even participate in the rally and
was down 10% between the open on Friday March 14 to the open on Thursday, six
days later. The Shenzhen Composite, down by nearly one-third since the
beginning of the year, did even worse.
This decline on mainland Chinese exchanges centers on fears of further monetary
tightening by the central bank in order to fight
inflation, reported at 8.7% for the 12 months ending February 2008, with food
alone nearly three times that, even as further revaluation of the yuan remains
off the table. Less widely recognized as a cause for concern outside China is
the fact of the increased prices that China's industry must pay for raw
materials inputs as well as semifinished goods.
The Hang Seng Index was also heavily down - it has now lost one-third its value
since early November, and continued its unremitting decline this past week.
Taiwan, basically unchanged on the week, remains a relative bright spot, down
only about 15% from its October/November high, and apparently finding support
at the 7900 level, which its rally bounced off on Wednesday 19.
The Nikkei 225 Index in Japan was very strong, up 1.8% on Tuesday 18 and 2.5%
the next day, led by financial shares and exporters such as Toyota. This
appears to manifest support levels in the low 12,000 range dating back to
spring 2002, spring 2004 and spring 2005: that is how long it has been since
the Nikkei has been at its present level. However, it is ambiguous how firm
those supports really are, as they are more of the extended plateau variety
than definite mountain peaks or valleys.
The vacancy in the Band of Japan leadership, due to the opposition's control of
the Upper House of Parliament, has already complicated decision-making and
implementation of policies in Japan for coordinated central bank intervention
in the international ongoing crisis of financial credit, liquidity, and
solvency. Neither has it helped to counter the manufacturing downturn within
Japan itself, and it continues to weigh on the Japanese market.
It is worth mentioning that this so-called credit crisis was recently revealed
to be in fact a liquidity crisis and will soon be further revealed actually as
solvency crisis. The Fed-engineered takeover of Bear Stearns by JP Morgan Chase
is in fact a leading indicator of the solvency crisis. It demonstrates that
permission to borrow from a Fed window does not translate overnight, if at all,
into increased equity capital.
In India, Mumbai's bellwether BSE Sensex 30 continued down after failing to
penetrate a resistance at the 15,800 resistance on Monday 16. Although
rebounding almost to 15,000, it is now dangerously close to its support level
at 14,500, after which it could fall further its next support in the
13,800-14,000 range. That said, the partially convertible rupee has firmed this
week against the dollar: at least so far.
By contrast, all major currencies in both Europe and Asia began to fall sharply
against the US dollar the day after the Fed interest rate cut. Commodities
plummeted accordingly but fell even further than the currency correction along
can explain. In 24 hours, oil dropped from over US$111 to under $102 per
barrel, and gold from $1,030 to $975 per ounce.
However, there is no single-factor explanation behind all these separate
declines, although in the wake of the Fed move their effects may have been
exacerbated and also fed into one another. The currency fluctuations are
arguably reinforced by short-term technical considerations, although the drop
in gold clearly drove the Australian, New Zealand and Canadian currencies all
significantly lower. The precious metals, on the other hand, have been
overbought for some time and were only waiting for an excuse to fall. Oil,
which rose with commodities this month, fell on new inventory reports that
projected decreased near-term demand.
As this column goes to press a day earlier than usual this week, Asian shares
have opened strongly down on Thursday 20 in the wake of Wall Street's
retracement the previous day. The Shanghai Composite has fallen 6.5% in early
trading as concerns grow of economic slowdown from a US recession. The Hang
Seng Index in Hong Kong is down 4.4%, and South Korea's KOSPI Composite is also
down although less dramatically. Japanese exchanges are closed for holiday.
It is very possible that Wall Street has put in a short-term or even
medium-term bottom this week, the day before the Fed's announcement. Other
markets, in Europe and the Americas as well as in Asia, have by and large not
yet found their own bottoms. Nevertheless, to the degree that there may be some
near-term relative pacification of volatility in New York, other exchanges may
have a chance for breathing space. Whether they are able to take that chance is
a question that will have to be answered on an individual basis for each
Not only the sectoral structure of the country's real economy but also domestic
political conditions in the respective country (the BoJ vacancy being a case in
point) will influence the various national markets, which will in turn
influence one another as well through the financial interpenetration of the
systems. We are only about half-way through the first act of a long play. This
play is neither Much Ado about Nothing nor All's Well That Ends Well.
We will be lucky if it turns not to be A Comedy of Errors.
R M Cutler http://www.robertcutler.org is a Canadian international