Earthquake: Japan’s earthquake and resulting tsunami have helped shake investor confidence in the global economy. Tensions are especially high because investors have so much to lose. Soft commodities and base metals have soared on hopes for a global recovery. Now protests in Saudi Arabia, weak Chinese trade data and sticky US unemployment have left these risk assets looking vulnerable.
Confidence and commodities have been the theme for most of the past year. Investors were preoccupied with hedging the risk of a sinking dollar in the context of a booming Asian recovery. The result was a pell-mell rush of cheap dollars into relatively risky assets: emerging market currencies, bonds and stocks, precious metals like gold and silver, oil, raw materials such as copper and coal, and foodstuffs like wheat and corn.
Even as optimism about the US economy sent emerging markets into reverse, the high price of traditional hedges like gold and oil meant investors continued to buy base metals and soft commodities. That helped push the Commodities Research Bureau Index up 46 per cent between May 25 last year and March 4. But strong gains mean investors now have more wealth tied up in these assets. As a result, they are very sensitive to suggestions that either commodities demand or inflation might be heading south.
Fear is now with us. Even before the 8.9 Richter-scale earthquake hit north-east Japan, China dealt a blow to confidence by reporting a rare trade deficit for February. Disappointing numbers on US jobless claims served as another blow. Further west, news that Saudi Arabia’s police fired on Shi’ite protesters has stoked fears that spiralling oil prices could hurt global growth. This doesn’t change the long-term prospects for the commodities needed to feed and house an increasingly prosperous Asia. But many investors have been playing commodities because of inflation, not long-term demand. That means that even a small shock is enough to send risk assets into a spiral. The economic impact of Japan’s earthquake remains to be seen, but when expectations are high, even a relatively modest knock can produce a severe reaction.