SPECIAL BULLETIN – The Japanese Earthquake and its Aftermath
The world’s third largest economy came to a virtual standstill as one of the more powerful earthquakes in recent memory, and, indeed, in recorded history, struck Japan and unleashed a literal tidal wave of death and destruction overnight. The Nikkei average fell by more than three percent (before closing early) following the huge, 8.9 point tremor that hit in the mid-afternoon local time. The Tohoku area of Japan contributes roughly 8% to Japan’s annual GDP.
The current death toll in the coastal city of Sendai for example, is nearing 300, and the toll on the country’s overall economy will as yet take some time to fully fathom. Commodities markets interpreted this tragic geologic event as obviously bearish for the moment, and they quickly reflected such perceptions with a more than 3.5% decline in crude oil, a 1%+ sell-off in copper, a larger than 2% drop in silver, and a 2.8% decline in palladium as well. All of Japan’s ports were ordered closed and they halted all unloading operations, while Tokyo’s subways and suburban rail transit system were also shut down.
Several large plants operated by Sony (six plants), Toyota (at least two plants), and others were shut down in the wake of the natural disaster. Black gold fell to under the century mark for the first time in more than one week, after speculators learned about the news that Japan had shut down not only manufacturing plants but also some oil processing facilities.
The Japanese yen gained several notches in value as currency traders saw scope for the Bank of Japan to buy back some of its currency in repatriation efforts. The currency had tumbled severely in the immediate aftermath of the quake. The country’s central bank is slated to hold a policy meeting on Monday and will make a decision announcement on the same day, rather than stretching the event over two days’ time, as is normally the case.
With risk aversion on the retreat due to the Japanese disaster, market analysts and market participants have now shifted focus away from the still-in-upheaval MENA region and are choosing to play it safe as the weekend nears. "This natural disaster could result in another sharp rise in risk aversion on markets and a continuation of yesterday's correction on commodity markets," said a Commerzbank analyst earlier this morning.
Still, this monster quake might eventually prove to be a positive for certain commodities, as Japan will eventually come out of its momentary economic paralysis and commences rebuilding and recovery efforts that might necessitate steel, cement and other materials to be imported at higher levels. Still uncertain is the effect this event might have on gold, at least domestically. Gold traders still recall the sizeable domestic gold purchases that followed the Kobe earthquake of 1995 after NHK Television showed individuals holding piles of burned paper currency that they had kept in their residences.
On the other hand, current Japanese gold holders who have been affected by the quake and could need to raise cash in order to rebuild their lives could come to market with some additional gold to sell and deepen the already hefty level of gold sales (of 30 and 50 tonnes respectively) that was recorded in the country in 2009 and 2010 as local investors opted to take profits in a counter-trend move to (most) other countries in the West.
Spot gold prices traded in nervous fashion this morning, following a weak opening near the $1,411 level on the bid-side. The maintenance of the $1,400 level remains the prime focus at this point, and talk of imminent assaults on fresh record prices has been shelved for the time being. The yellow metal’s six-week-long ascent on the technical charts was brought to a halt with yesterday’s sizeable decline in values. Gold is now still taking its cues from oil and of course the US dollar as well, but there is also quite a bit of attention being paid to the possible aftershocks of the recent slump in the Dow; one that might bring about some margin-call liquidation sales by investors. On the other end of the spectrum of possibilities is the temporary and potential safe-haven bid that the yellow metal may attract in the wake of the Japan quake and the on-going unrest in the MENA region.
A “Day of Rage” was scheduled to take place in Saudi Arabia today and any news developments from that part of the world will likely be factored into the plays that New York traders will be making later on in the day, as they square their logbooks ahead of the weekend. This may turn into yet another Friday at the end of which few will wish to head home without factoring in such uncertainties as are currently manifest around the world.
Spot silver fell by another $1.28 overnight, to reach a low of $34 per ounce, continuing its slide from recent record levels. Maintenance of that round figure remains the focus in that market, but out-sized moves in either direction should not be discounted, even before the trading day comes to a close. Nervousness is very much in abundance among speculators in this volatile niche.
Platinum was the only metal to show a gain this morning, as it climbed 0.5% to the $1,772.00 spot bid mark following a brutal, near $50-per-ounce sell-off that took place on Thursday. Palladium slumped by an additional $28 this morning, breaking to under the $750 support zone by about $10 at one point in time. Rhodium remained unchanged at the $2,350.00 mark and no fresh movements were being anticipated in that metal before the close of trading on Friday.
In other news of current and future significance to commodities’ markets, the Chinese National Bureau of Statistics announced this morning that the country’s inflation rate climbed at a 4.9% pace in February, repeating the figure recorded in January, but coming in higher than had been expected by market analysts and economists. Once again, this level of increase in consumer prices prompted the PBOC’s Governor to reaffirm the importance of interest rates in the combat against inflation. Premier Wen has recently stated that the top priority on China’s 2011 agenda is the battle to be waged on rising prices. Thus, the stage appears set for some kind of PBOC action, perhaps as early as the upcoming weekend period.
For now, the weekend presents the grim, top-priority task of assessing the situation in Japan. Our thoughts and prayers are with the people of Japan at this difficult hour.
Jon Nadler is a Senior Analyst at Kitco metals Inc.