Nikkei Surged Tuesday, But Looming Problems Cloud Long-Term Outlook
Japanese stocks surged Tuesday, easily outpacing earlier double-digit U.S. and European advances, for their biggest one day rise ever (N225: +14.15%).
Stocks “rallied” on news of concerted European action to shore up the region’s financial system, the promise of U.S. action and on expectation the Japanese government will follow suit. We experienced a not so high trading volume and turnover, or basically short covering and a huge number of stocks stopped at their daily up-limit. Given a combination of the two, it seems Japanese stocks are poised for another day of big up-side, but the extent will certainly be impacted by trading overseas. So far, European benchmarks are up above 5% intra-day.
Beyond the next trading session, the big question is if any lower-than-expected earnings or lowered forecasts will put downward pressure on stocks and cap the recovery. Meanwhile, the return of confidence to the credit market and spillover to the stock market remains key.
That said, it is hard to be all that bullish given the impaired global financial system (my bailout is better than yours), slowing economic growth (who will buy the goods, Americans can’t, Japanese won’t) and looming potential problem areas such as commercial real estate securitization and the possibility of a negative black swan event in the derivatives universe (just trying to keep it real although avoiding any fallout would probably be impossible).
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