Nikkei slumps 6.2%, US futures lower, $183bn liquidity injection

The Bank of Japan came to the rescue of earthquake hit financial markets with a $183 billion liquidity injection to start the week but this did not prevent Japanese stock markets shedding around seven per cent and US stock futures turning negative.

Just as the technicians are now battling to bring several Japanese nuclear reactors under control, dousing them with sea water as all other cooling systems have failed, the task facing central bankers is how to prevent a meltdown.

$99 oil

WTI crude oil slipped back below $100, gold and silver spiked higher and global stock market futures headed lower across the board. Analysts in London expected a two per cent fall.

Markets seem uncertain whether to treat the 9.0 earthquake as just another natural disaster with few long-term consequences or something more sinister, the finger coming out of the Japanese dyke.

The world’s most publicly indebted country looks ill placed to handle such a hugely expensive tragedy both in financial and human terms but Japan has the experience of frequent earthquakes of deadly dimensions. This could be just a bigger dose of the same nasty medicine.

However, there is something of an energy crisis now. Six major oil refineries are out of action and the worst affected sector is nuclear power where a fifth of capacity is down, most of it probably for good. Sea water ruins reactors beyond repair.

The yen has perversely strengthened. When Japanese investors turn risk-averse they sell assets abroad and buy yen with the proceeds. That is a blessing and a curse as it leaves the currency overvalued when it needs to be weak to boost exports.

Market intervention

The Bank of Japan has intervened massively today and will clearly sell yen as far as necessary to try to stabilize this situation. The enormous capital damage done by the earthquake is another matter, and the impact on the bottom line of companies whose factories are shut and will now be affected by power cuts.

This morning financial markets are coping with the after shocks of the earthquake. It will be sometime before a full assessment of the impact of this disaster can be made but it could have triggered a far more extensive meltdown.

Global markets have flown higher and higher in the rally of the past two years and have been overdue a correction. This now seems inevitable. Most markets have fallen below critical support levels. Arabian bourses enjoying a bounce yesterday will soon turn down again.