Japan

Market Update 08-31-10

The Bank of Japan stepped up its stimulus program over the weekend, announcing another 10 trillion yen (a little short of $120 billion), six-month loan program to try to prop up its sluggish economy. The goal is to try to get credit flowing more freely and to weaken the yen, which reached a 15-year high versus the dollar earlier this year as investors flocked to the yen’s perceived stability. In addition, the Japanese Prime Minister Naoto Kan announced a ¥920 billion (approximately $11 billion) economic stimulus. All these measures are aimed to help Japan’s economy, whose exports are being hurt by the strong yen, and whose domestic production remains sluggish.
 
The foreign exchange market reaction was lukewarm to the news, and the yen has held its ground on belief that the additional loan expansion alone (no quantitative easing was announced) will be insufficient to reverse the yen’s recent strength. The Asian stock markets, however, received a jolt from Japan’s actions in addition to expectations of further quantitative easing from the U.S. and the E.U., with the MSCI Asia Pacific Index booking its biggest gain in five weeks immediately after the announcement.
 
While Japan’s economic recovery, too, is slowing, at 3.4 percent it is still projected to grow faster than either the U.S. or the E.U.
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Market Update 08-17-10

It was only a matter of time, but China has now officially overtaken Japan as the second-largest economy in the world. According to government statistics, China’s GDP totaled $1.33 trillion in the second quarter, slightly ahead of Japan’s $1.28 trillion output. Given China’s growth momentum and Japan’s own sluggish economic recovery, it appears almost certain that for the full year China’s economy will be larger.
 
This is only the latest milestone for China, as it has already surpassed the U.S. as the world’s largest energy consumer and the biggest car market, and Germany as the largest exporter. Although its economy is still only a fraction of the U.S. economy, China could surpass the U.S. as number one as soon as 2030. Despite prodigious growth in the last few decades, large parts of the country still remain woefully underdeveloped and per-capita income is still less than one-tenth of that of the U.S., still leaving plenty of room for urbanization and growth.
 
With its growth, however, China will put an increasingly large strain on the world’s resources. Not blessed with rich natural resources but flush with cash, the Chinese have been on a rampage to secure resource assets around the world via acquisitions through its state-owned companies.
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Market Update 06-29-10

The leaders of the Group of 20 countries have announced that their response to the most pressing economic issue of today, the European credit crisis, is to cut deficits and require higher bank capital reserves once recoveries occur. Advanced G20 economies (excluding the developing country members of G20) will shoot for reducing their deficits by 50 percent by 2013 and to stabilize their debt-to-GDP ratio by 2016. Each member will be able to proceed at their own pace depending on how quickly recovery takes hold in their respective countries, however, giving the appearance that the resolution is more lip service than commitment with any bite.

There’s also a divergence of immediate approach between the U.S. and its European counterparts. While the U.S. has pushed for more stimulative efforts to prevent a double dip recession, the U.K. and Germany are for spending cuts. The G20 as a group is struggling to balance these differing views, and the result is the half-hearted deficit reduction goal. This underscores how difficult it is to get unanimous agreement among nations to take coordinated global action and highlights the-rock-and-a-hard-place dilemma that the highly indebted developed countries find themselves in. On the one hand, national debt is getting out of hand, but on the other, spending cuts could send their fragile economies spiraling into another downturn.Read more...

Striving for Stability: 06-10-10

U.S.. stocks hit a new closing low this past Monday, bringing the decline in the benchmark Standard & Poor's 500 to about 14.5 percent in six weeks. Monday's decline marked a continuation from a grim Friday, when the market tumbled because of a very weak monthly jobs report. The Labor Dept. said payrolls increased by a solid 431,000 in April. The bad news: Temporary Census workers accounted for almost all of the gain. The market has since moved higher again, aided by today's strong advance.
 
Stocks rallied today, with the Dow Jones industrials up 273 points, after economic reports from China, Japan and Australia indicated accelerating growth. China had its biggest increase in exports in six years. And the European Central Bank boosted its forecast for euro-zone growth this year. But the new ECB number for 2010 is only 1 percent, with 1.2 percent for 2011.
 

There are indications that the European situation is beginning to stabilize. But a key test remains: What will happen when more bad news comes out, as it inevitably will? Last Friday's steep market decline was partly attributable to comments by government officials in Hungary that a government debt default was possible there.Read more...

Is the End Near?: Update 05-27-10

Despite hitting a new market-correction closing low only yesterday, evidence is building that a bottom is forming. All told, the Standard & Poor's 500 had tumbled 12.4 percent in less than five weeks.

On a closing basis, stocks were in a tight range over the three previous days this week. Today, the Dow Jones industrials jumped 285 points, and the Standard & Poor's 500 was up 3.3 percent. This rebound provides additional hope, but no definitive conclusion yet, that the market is forming a new base.

This doesn't mean the low has been reached. But we think the worst is over. First, it's necessary to recognize that periodic volatility is a given in the financial markets. Second, a market pullback was long overdue, and it finally arrived this month. Such short-term events are necessary because they eliminate excessive investor enthusiasm and pave the way for more gains ahead. It's still too soon to say that the market advance from the historic lows of March 2009 is over. And market retreats in a bull market typically are fast but short, as this one has been.

There are no guarantees. But based on a variety of historically reliable indicators, the May mayhem created an extreme enough level of investor pessimism to signal that the worst "should" be over. Not that there is no longer a risk of further declines, but that we should start to see some improvement.Read more...

Market Update 05-12-10

This was a wild week. The worries about the future of the European Union moved into panic mode over the growing crisis and concerns that the worsening credit crunch could choke the economy. Investors became more concerned about their European investments after the European Central Bank’s decision to keep interest rates at their current level and the ensuing comment of the ECB President Trichet of not even discussing buying government bonds to stem the crisis. Last Thursday, the Dow closed down 347 points – and that was after bouncing back from the biggest intraday drop ever, the drop that took some blue chips down 30 percent and more. At one point during the day, the Dow was down by roughly 1,000 points.
Prompted by the euro’s slide and plunging confidence, however, the EU and IMF got together over the weekend and put together a $1 trillion loan package plus a sovereign debt purchase program to address the debt crisis overrunning Europe. This worked to calm investors’ fears and lead to monster rallies in equity markets around the world on Monday, with markets in Portugal, Italy, and Spain (feared to be the next countries to go into crisis mode) posting double digit gains. Worldwide stocks gained about 5 percent as a whole.
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Stocks Fight Off Sovereign-Debt Crisis: 04-29-10

Renewed fears about the government-debt contagion in Europe sent stocks around the world sharply lower Tuesday. But the market's reaction to the sovereign-debt problem so far pales compared with the grim times of 2008.

A strong financial-markets foundation is the best defense against bad news. And the financial markets rebounded yesterday and today. One reason is that Europe's politicians finally moved ahead more aggressively to deal with the growing debt problem.

But also important is the continuing impressive rebound in earnings growth. About 80 percent of the companies in the S&P 500 that have reported results for the latest quarter have exceeded estimates. Even in Europe, where economic growth is sluggish, corporate earnings are rebounding well.

Standard & Poor's sparked Tuesday’s sell-off by cutting Greece's debt rating to below investment grade, or "junk." The government debt of Portugal was also lowered by two levels to A-, providing clear evidence that the debt woes are spreading.

The result was another of those periodic flights to safety that still happens pretty often. The dynamic there is strength of the U.S. dollar, investor enthusiasm for U.S. Treasury securities and declines for commodities. This time, though, gold is doing very well in a reversal of its previous tendency to weaken when the dollar strengthens.Read more...

Mid-Week Update 03-31-10

As we mentioned last week, Vale S.A. (VALE) recently made the decision to switch to a more flexible, quarterly pricing system that would lead to a boost in revenue for the company. While the short-term impact of the decision will likely be marginal – new annual prices will soon be more closely in line with the quarterly price – the longer-term effects of this will be significant.
 
This week we learned more about how this transition would occur. Starting April 1, Japan’s Nippon Steel Corp. and South Korea’s Posco will purchase iron ore from Vale for three months at a price of between $100 and $110 a metric ton, up from the current benchmark price of roughly $62 a ton. This was the first quarterly agreement signed by Vale, which is the largest standalone iron producer in the world and a member of our Growth Portfolio. It was also announced recently that similar deals had been reached between BHP Billiton (BHP) (the world’s third largest iron ore producer and member of Growth and Income Portfolios) and its Asian customers.
 
The significance of these deals is that they mark the end of the decades-old, annual pricing system used by the industry. Previously, benchmark prices were set on April 1 and remained in place for the following 12 months, regardless of what happened in the spot market.
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Market Update 02-17-10

The eyes of the world are on Canada these days as the country hosts the quadrennial Winter Olympic Games. But markets around the globe are paying it less heed than other, more troublesome parts of the globe. And we are not just talking about Greece, although it certainly is among the hottest topics of conversation on Wall Street and beyond.Read more...

It's All Relative: 02-04-10

The proposed federal budget for 2010-2011, released this week, presents a bleak picture. Even with some optimistic assumptions, it calls for a projected deficit of nearly 11 percent of our entire national economic output. Only during the Civil War, World War I and World War II have deficits run so high, but at least those came with the expectation that spending would drop when those conflicts ended.

Now, with huge deficits a virtual certainty for years to come, how long can the world’s biggest borrower remain the world’s biggest power, particularly with the lack of political will to address this growing problem in a responsible way?

So it's all the more amazing that the U.S. dollar continues to climb, hitting a seven-month high today. This is because there are even bigger problems in Europe. The perceived risk of default of government bonds issued by Greece, Portugal and Spain is soaring. This poses a huge dilemma for the European Monetary Union, which may have to bail out its weakest members.
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