After the turmoil of the past few weeks, investors are yearning for clarity on a broad swathe of extraordinary issues that have turned this year’s assumptions on their head.
The question before them is how to absorb and price in the impact on the global economy of Japan‘s triple disaster — with the threat of nuclear reactor meltdowns the biggest unknown — as well as increasing violence in energy-rich Arab countries.
And there is also the festering issue of euro zone debt, due to come under scrutiny at a European Union Summit at the end of the week.
In the past week, all of this has meant that stocks have fallen in a move away from risk, currencies have been agitated by the prospect of Japanese investors bringing their money home, oil has bounced back – threatening again to manacle future global economic growth – and policymakers have become worried.
It is enough to make some longer-term investors freeze, or at least not make major moves.
“The situation is too fluid and too uncertain to warrant changes,” Joost van Leenders, strategist at BNP Paribas Investment Partners, said in a note to clients.
This has two implications. One is that markets have held up relatively well over the past week — relatively, given what has occurred.
Equity market losses since the earthquake in Japan on March 11 have been around 2-3 percent, except for Tokyo’s 10 percent fall. Volatilty has risen, but is still far from where it was during the height of the euro zone debt crisis.
The second implication of having investors waiting, or at least not changing plans wholesale, however, is that there is a large potential for major moves when things become clearer — possibly in the coming week.
Equity losses have also been partly restrained by an initial fall in oil prices.
That was already being reversed by the United Nations authorizing military attacks on Libya, where forces loyal to Muammar Gaddafi were closing in on Libyan rebels.
Libya’s pledge to halt its actions will be tested in the coming week, but Bahrain is also in focus, having cracked down on mainly Shi’ite Muslim protesters, a move that has angered Iran and raised tensions in the oil-exporting region.
JAPAN IS THE KEY
The heart of the uncertainty for investors is what the earthquake, tsunami and nuclear breakdown will mean for the world economy and financial markets, and this could well become clearer in the coming week.
The initial reaction was that the world economy would cope quite well, seeing only 0.2 or so trimmed from global growth that was running at around 4.4 percent.
But the worsening nuclear crisis and the potential for Japanese investors to pull money back from world markets (or at least not put more in), has raised concerns about the impact on markets even if Japan does manage a V-shaped recovery.
“The direct or first round economic effects of the tsunami are likely to be relatively contained to Japan, but the financial market spillovers could have very serious global repercussions,” Fathom Consulting said.
Friday’s Group of Seven coordinated intervention into foreign exchange markets to cool the yen was the most vivid example to date. The yen had been soaring, driven either by money being repatriated or positioning for it to be.
Traders are expecting more intervention in the coming week.
Investors were also becoming more cautious before the earthquake, partly as a result of the spike in oil. Some see the disasters in Japan as confirming that trend.
“This is a catalyst for a fairly large shake out,” said Graham Neilson, chief investment strategist at Cairn Capital, referring to risk assets as a whole.
MORE TESTS AHEAD
Investors, in the meantime, will get a snapshot of how higher oil prices are playing into various sectors of the world economy over the coming week.
Euro zone PMI manufacturing and services flash estimates on Thursday, for example, will show whether oil prices have led to a dent in sentiment.
The split nature of the U.S. economy should also be on view, with potentially weak housing data expected on Monday and Tuesday but good durable goods orders on Thursday.
At the end of the week, the EU summit is set to rubber-stamp an already agreed but surprisingly strong package of euro zone crisis measures.
But the euro zone’s highly indebted members have enjoyed little respite from market pressure since the package was unveiled, with Portugal facing ever rising borrowing costs.
Bond investors will be looking for clarity on the welter of conditions attached to the plan for the EFSF to buy bonds from the primary market and the timetable for implementation.
And any sign of delays in implementation or watering down of the final deal risks triggering a fresh sell-off which might well sweep across the euro zone periphery.