G3 Recap 3-14-11

Main Items:

  • Japan is now facing its worst economic shock since WWII. The official toll reached 1,597, with 1,481 more missing and 1,683 injured, the National Police Agency said. Damage estimates are now in the range of 15trn Yen, or 3% of GDP. The BoJ injected 18 trillion yen ($220 billion) into the money markets. 15 trillion yen was offered in same-day funds, 3 trillion yen in JGB repos, and the existing asset purchase program will be increased by 5 trillion yen (to 10 total) to buy more commercial paper, corporate bonds, ETFs, REITS and JGBs.
    Two nuclear plants / 4 reactors have partially melted down, and 15-20% of the Japanese electrical grid has been knocked out, resulting in rolling blackouts that are expected to last at least 2 weeks. Most major Japanese manufacturers closed plants today. Japanese stock markets are down a bit less than 6%, although other Asian stock markets actually closed higher.
  • EU Summit produced better than expected results over the weekend. Measures passed include: (none were expected)
  • Increasing the EFSF’s effective lending capacity to 440bn from 250bn, and the ESM capacity to 500bn.
  • Allowing the EFSF to participate in government bond auctions
  • Cutting the lending rate to Greece by 100bps and lengthening the repayment schedule from3 to 7.5 years. (Ireland’s rate was not cut)
  • Acknowledging the need to cut the EFSF lending rate in general, but with out providing specifics

China’s Wen reportedly said that this round of inflation is global, and needs to reduce liquidity to control inflation. He also reportedly said that China ‘must no longer worship GDP.’

Pro-Gadaffi forces reportedly continue to advance towards the oil areas in the eastern part of Libya. Based on media reports, the tide has turned in Gadaffi’s favor. Parts of the international community, including the Arab League, have come out in favor of enforcing a no-fly zone in Libya.

Overseas Data:

  • China M2 growth slowed to 15.7% YoY in Feb vs 17.0% expected and 17.2% previously. This is the slowest rate since late 2008.
  • EU IP rose 6.6% YoY in Jan vs 6.5% expected and 8.0% previously.


  • As has been noted elsewhere, while the immediate effects of large natural disasters are negative, on net, they are positive for growth. With Japan being a large net exporter, the halt in Japanese exports is a net positive for its trade partners as local firms typically get more business. The reconstruction should also be positive for base metals once the temporary demand drop is over, while the potential spreading of radiation via air currents to surrounding countries should keep the risk premium in agriculture prices elevated.
    With expectations for the damage now much higher compared to Friday’s estimates, it is now harder to handicap what will happen to Yen assets. The MoF will probably have no international resistance against sharp intervention in the FX market. But in the absence of intervention, it is unclear how much recent actions will expand narrow money supply, and hence, affect FX. A quick 23 trillion increase in reserves certainly could have a sizable impact against an M1 stock (white, below) of 500 trillion, but only if the market expects the increase to persist.

    A successful cheapening of JPY will also be good for Japanese stocks. Indeed, depending on when the power grid can be repaired, Japan’s position as a net exporter, in conjunction with its rebuilding expenditures should be a sizable positive for Japanese equities down the road. We should probably wait for positioning data to indicate a clearing of speculative positions before this trade, however. CFTC data on speculative positioning in the Yen-denominated Nikkei contract remains quite elevated as of early last week:

  • Separately, the risk off move looks like it is stabilizing. Despite the weak equity performance, many commodities (where CTA positions were likely concentrated) posted positive returns on the day. The Ags complex posted the first positive return since the first week of March after being down sharply, while copper printed its second consecutive positive close. Maybe not the end of the risk off move, but maybe we’re due for a bounce.