As we ponder over the possibility of a nuclear nightmare in Japan, global stock markets staged a rebound after two days of losses. Is this the start of a V-shaped rebound?
The heavy and indiscriminate selling over the past 2 days was pretty much a knee-jerk reaction to a nuclear catastrophe scare on top of the negative shocks to demand and supply chains that the earthquake and tsunami have wrought. From the peak in February, the Nikkei index plummeted more than 20% as of Tuesday.
If it were just the earthquake and tsunami, then a fall of such magnitude would have presented a buying opportunity as Japan will eventually recover as a society and as an economy as tragic as the events have been. Just for perspective, the Nikkei fell after the Great Hanshin earthquake of 17 January 1995 by about 25% over a period of 5-6 months. It can be argued that the bottoming process then was compounded by an over-valued market and prolonged by the collapse of Barings in the UK.
However, the nuclear disaster brewing now is the wild card. We are in essence dealing with a binary event – either a nuclear meltdown or no meltdown. In this binary bet, you buy if you believe in the no meltdown scenario and sell if you agree. With the nuclear situation still fluid with both positive and negative news flows, we see the 5.7% rebound in the Nikkei today as largely short covering, although there are surely some investors taking the binary bet.
The worry is not about the quantifiable impact of the natural disasters on the economy and industries. The fear is of the unknown and the unquantifiable implications of the current nuclear fallout which could range from controllable radiation leaks with minimal implications on the local and global economy to a level 7 nuclear disaster of the magnitude of Chernobyl. And Japan is not Chernobyl. It is the third largest economy in the world and accounts for a fair bit of the global supply chain especially in high value added technology.
No, we are not about to make the binary bet. This is not like making a call on interest rates or a currency bet. Official statements do not help as they are usually less upfront. But from what I’ve been reading about the Fukushima nuclear reactors, a complete meltdown seems unlikely. Still, we keep a watchful eye on the developing situation and we’ll use technical indicators to guide us in any entry levels. We will keep you posted.
The heavy and indiscriminate selling over the past 2 days was pretty much a knee-jerk reaction to a nuclear catastrophe scare on top of the negative shocks to demand and supply chains that the earthquake and tsunami have wrought. From the peak in February, the Nikkei index plummeted more than 20% as of Tuesday.
If it were just the earthquake and tsunami, then a fall of such magnitude would have presented a buying opportunity as Japan will eventually recover as a society and as an economy as tragic as the events have been. Just for perspective, the Nikkei fell after the Great Hanshin earthquake of 17 January 1995 by about 25% over a period of 5-6 months. It can be argued that the bottoming process then was compounded by an over-valued market and prolonged by the collapse of Barings in the UK.
However, the nuclear disaster brewing now is the wild card. We are in essence dealing with a binary event – either a nuclear meltdown or no meltdown. In this binary bet, you buy if you believe in the no meltdown scenario and sell if you agree. With the nuclear situation still fluid with both positive and negative news flows, we see the 5.7% rebound in the Nikkei today as largely short covering, although there are surely some investors taking the binary bet.
The worry is not about the quantifiable impact of the natural disasters on the economy and industries. The fear is of the unknown and the unquantifiable implications of the current nuclear fallout which could range from controllable radiation leaks with minimal implications on the local and global economy to a level 7 nuclear disaster of the magnitude of Chernobyl. And Japan is not Chernobyl. It is the third largest economy in the world and accounts for a fair bit of the global supply chain especially in high value added technology.
No, we are not about to make the binary bet. This is not like making a call on interest rates or a currency bet. Official statements do not help as they are usually less upfront. But from what I’ve been reading about the Fukushima nuclear reactors, a complete meltdown seems unlikely. Still, we keep a watchful eye on the developing situation and we’ll use technical indicators to guide us in any entry levels. We will keep you posted.
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