Di Nikola Kedhi.
This has been a hectic week for everyone, especially in the Old World. European markets reacted to the latest tragedy befalling our continent in a surprising way. Japan’s Prime Minister faces a major failure as the Asian island country slips into recession.
There was a common perception that markets in Europe would be down after the terrible event that rocked Paris last Friday. Apparently, they underestimated the resilience of the stock markets, which were able to hold still and later even expand. On Monday, The CAC 40 French index decreased 1.2% at the opening, but quickly regained 0.3%. The Stoxx Europe 600 Index went up 0.3% as well and closed the day with very little change. The following day both CAC 40 Index and Stoxx Euro 600 increased 2.8% and 2.5% respectively. The increase in the French index was the biggest in developed markets, while the European index saw its largest gain in six-weeks. Officials have declared that French markets will continue to remain open.
Even though there was such a moderate reaction, stocks are likely to face pressure in the near future, not only in Europe, but also elsewhere. This distress comes from a contraction in trade, a reduction in tourism and a decrease in economic confidence. One of the few sectors that has performed quite well and is expected to be on the rise is defense. For now, investors are observing how all these factors are impacting European economies and what will be the most likely outcome for the future.
At the beginning of the week, Euro decreased to its lowest levels in 7 months, thus erasing any gains from the previous week. Currency brokers associate this drop with Euro being less attractive compared to other currencies. On Tuesday, Euro fell 0.8% with respect to the dollar, now trading at $1.06. This fall is partially due to the strengthening of the dollar as a result of the expectations of interest rate increase in the US.
The biggest surge this week was seen in British stocks, which rose to a six-month high. The FTSE 100 rallied 2%, thanks to a 10% jump in the stock of Smiths Group Plc, a British multinational engineering business.
In the meantime, Japan is in a crisis. Its economy has fallen back into recession for the fifth time since 2008. GDP contracted an annualized 0.8% in the third quarter, signaling that the economic reforms known as Abenomics have not given the desired effect. Abenomics consists in buying bonds massively along with stimulus from the government and structural reforms. The goal is to increase inflation, and boost the economy. Structural reform means liberalizing the electricity and gas industries and Japan’s participation in the Trans-Pacific free trade deal. However, a recent poll performed by Nikkei demonstrates that only 25% of the population believe that Abenomics will succeed in resuscitating the Japanese economy.
The main reasons for the slow growth are two: weakness in new investments and the decreasing inventories. Not surprisingly, stocks in Tokyo began the week with a decrease of 1% and it is not likely that markets will see any improvement in the next few days. What everyone agrees upon is that the Bank of Japan should act immediately, before the situation in the third biggest global economy worsens even more. A new approach needs to be found in order to ensure further monetary stimulus and to push harder for structural economic reforms.