Japan, India and Lebanon = The Perfect Storm

With news this morning that, as expected, the Bank of Japan raised interest rates to 0.25 percent –with the news yesterday that Israel is bombing its northern neighbour – and with the fall out from this weeks bombing in India – could this series of event converge to provide the ‘Perfect Storm’.

Concluding its two-day policy meeting today, the nine members of the Bank of Japans board vote unanimously voted to raise interest rates from Zero to 0.25 percent. At the same time the bank has raised its assessment of the Japanese economy to that of ‘gradually expanding’. At the same time the governor of the BoJ stated there was little expectation of further rises in the near future and that any increases would be very gradual and slow. The Japanese market had already factored today’s increase in, so the market reaction to the announcement was muted – the Nikkei closed down 253 at 1485.

The Indian market now seems to be facing up to the reality on two fronts of the potential withdraw of funds from the market and leverage in the ‘carry trade’ which is expected to cause flight once the BoJ raises rates, and on the other hand a more sober view on the fall out from the bombings in Mumbai (Bombay) on Tuesday. The SENSEX closed down 1.19% at 10,687.22.

Further west in the middle east, Israel continued and widened its attacks in the Lebanon, and at the same time Hizbollah was able to launch rockets into the Israeli port of Haifa.  All this has raised concerns about a wider ranging conflict bringing other Arabic countries in and raised the spectre of oil limitations.

All this drives the uncertainty and has been reflected in the record price of Oil, which topped $78.40 for US light crude today. An $80 a barrel oil price is no longer out of the question in the short term.

The US and European markets were awash with Red today, though the drop has been less than expected so far. We expect a rapid fall off towards the end of the European and US sessions as traders close positions for the weekend.

As we pointed out in our previous article – events have conspired over the last week or so to create the scenario for the perfect storm. Once trading starts again on Monday we expect the corrections to fall sharper than today – once the enormity of the confluence becomes apparent.