It’s probably not the time to say this, given Tuesday’s sharp sell-off, but are some financial markets overreacting to the Japanese earthquake?
From Nomura:
An annual standard deviation for the Nikkei in just three days! For Nomura’s Owen Job, that seems to be an out sized and over-the-top reaction.
Assessments of the economic impact of the earthquake in Japan vary,but at just over $100bn this would be similar to the cost of Hurricane Katrina to the US. The S&P declined 5% in response to Katrina, but later rebounded 10%. The Nikkei is currently down nearly 20%.
Another major market repricing after earthquake has been the decline in US 2yr rates across major curves, down 16bp, 22bp and 15bp across USD, GBP and EUR curves, respectively (adding to the 16bp and 10bp declines in US and UK 2yr rates since the escalation of the MENA crisis). This is not a rational and data-based repricing, in our view. US economic data has been strong, and the major contagion channel for both crises is likely to be through energy costs. A rise in energy costs is ambiguous for monetary policy – it could simultaneously add to downside growth risks and upside inflation risks.
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