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Japanese Stocks Drop 3.8% After Speech by Prime Minister Abe

Wednesday, 05 June 2013 07:39 AM

Disappointment at Japan's latest package of measures designed to boost its economy combined with continuing uncertainty over the course of U.S. monetary policy following mixed economic news to weigh on markets Wednesday.

The mood has been fragile all day, especially after Japan's benchmark Nikkei 225 index had another day it would rather forget. Investors in the country appeared disappointed at the lack of detail in a keynote speech on the economy from Japanese Prime Minister Shinzo Abe.

The Nikkei closed down 3.8 percent at 13,014.87, another big swing that means it has fallen around 20 percent from its peak in mid-May — the commonly used definition of a bear market.

"Abe's speech today unveiling his growth strategy failed to live up to the market's expectations, revealing little that was new and focusing rather too much on long term aspirations for most tastes," said Simon Derrick, a senior analyst at Bank of New York Mellon.

For much of this year, the Nikkei had been the darling of stock investors as it rose by nearly a half as investors hoped a big monetary stimulus from the Bank of Japan would finally get the world's number 3 economy out of its near two-decade stagnation.

The latest setback in the Nikkei kept traders around the world on edge as investors position themselves for the monthly U.S. nonfarm payrolls report on Friday, often a release that sets the market tone for a week or two after its release.

In Europe, the FTSE 100 index of leading British shares was down 2.1 percent at 6,419 while Germany's DAX fell 1.2 percent to 8,196. The CAC-40 in France was 1.9 percent lower at 3,852.

In the U.S., the Dow Jones industrial average was down 1.2 percent at 14,991 while the broader S&P 500 index fell 1.27 percent to 1,610.

Trading in the U.S. was little affected by a slightly worse-than-expected private payrolls survey from ADP — up 135,000 in May instead of the expected 165,000. A modest improvement in the main non-manufacturing index from the Institute for Supply Management to 53.7 from 53.1 also had little impact — anything above 50 indicates expansion but taken together with Monday's below-par manufacturing reading, the ISM figures point to a slight moderation in U.S. growth.

Still, a bumper payrolls report on Friday could blow all expectations out of the water. For the past few weeks, market directions have largely depended on the vagaries of the U.S. data and their implications for the future of the Fed's monetary stimulus program.

"Most importantly for the Fed would be how employment growth is playing out," said Jennifer Lee, an analyst at BMO Capital Markets. "We will see how the official May figures fare on Friday but in the meantime, signs are pointing to a soft figure."

The Fed's monetary stimulus program has been a big boon to stock markets over the past few years. The latest purchases, amounting to $85 billion a month, have helped propel many global stock indexes to record highs this year. The purchases are designed to keep interest rates low and giving the U.S. economy a lift. A reduction in the amount purchased would indicate that the Fed is more confident about the outlook.

The latest issue of the "Beige Book", the Fed's assessment of the U.S. economy, is due out later Wednesday and may give investors further insight into coming monetary policy.

In the currency markets, the dollar has generally risen when expectations grew that the Fed would limit its stimulus program earlier than planned.

Following the figures, the dollar was little changed.

The euro was up slightly at $1.3090 while the dollar was 1.1 percent lower at 99.06 yen. The rise in the yen may be counterintuitive given the performance of the yen but the Japanese currency often gains ground when investors are reluctant to take on risk — as evidenced by the performance of stock markets.

Elsewhere in Asia, Hong Kong's Hang Seng lost 1 percent to 22,069.24 while South Korea's Kospi fell 1.5 percent to 1,959.19. Australia's S&P/ASX 200 dropped 1.3 percent to 4,835.20. Benchmarks in Singapore, Indonesia, Thailand, the Philippines and mainland China fell.

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Disappointment at Japan's latest package of measures designed to boost its economy coupled with concerns over the course of U.S. monetary policy to weigh on markets Wednesday.Japan's benchmark Nikkei 225 index had another day to forget as investors appeared disappointed at...
Wednesday, 05 June 2013 07:39 AM
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