Why Australia’s Stock Market is being sold down
The tragic devastation caused by the earthquake and tsunami has completely shut down Japan. Whole towns in the North East of the country have been erased, and thousands are dead and missing. It’s realistic to expect the death toll to just keep climbing. Factories have been destroyed, and a large part of the country’s ports have been crippled. Imports and exports have been ground to a holt.
The markets are in mass panic about the threat of nuclear meltdown at Fukushima. The US market fell 300 points last night on a few ‘experts’ talking the risk up.
Only time will tell what the radiation levels are and what damage it will do long term as fear plays havoc in people’s minds and on the markets.
So why is our market falling?
Well, Japan is Australia’s second biggest bilateral trade partner, so the ASX200 is moving quickly in response to the movements in the Nikkei 225. Yesterday’s bounce in the Nikkei caused our market to bounce. And right now, the Nikkei is down again and so is ours.
Another key driver is the unwinding of the ‘carry trade’. This is when investors borrow Yen on the cheap, and invest it in higher yielding markets overseas. The Aussie market is a favourite place for it. This is partly why there is a correlation between the Aussie -Yen exchange rate, and the ASX200.
Right now, those carry trade investors are pulling their funds out of Australia and getting them back to Tokyo. With so many of them rushing for the exits, the Yen is soaring, and the Aussie Dollar is getting a beating. We saw the Aussie-Yen basically gap down from 79 to 75 just this morning.
Depending on how many of these traders follow suit in coming days, we could see some violent short term falls in the Aussie Dollar, which is already in a dangerous technical position. The volatility will cause up and down days in the days and weeks and maybe months ahead.
It’s early days yet but there will be bargains to be picked up once the dust settles and the full impact is exposed.It is extremely unfortunate and difficult circumstances,. The people of Japan are still suffering immensely, and our thoughts and prayers remain with them.
