War breaks out in Libya; Stocks Appreciate
Mon, Mar 21, 10:11 AM ET, by ForexTraders.com
We leap straight from the nuclear chaos in Japan to a war in Libya, and even as the former shows some signs of gradually coming under control, the new crisis in North Africa is apparently only beginning. The main difference between the Japanese crisis and the Libyan War in terms of their relevance to the market is that while the Japanese shock could have easily crashed any rally, the Libyan War may be put forth as an excuse to appreciating oil prices and commodities due to the peripheral role of the country and its resources in the overall scheme of things. In other words, we do not believe that the war itself is a major threat to overall market sentiment, other factors remaining constant.
In Libya, the West has a new war after Colonel Qaddafi violated a U.N. Resolution passed one day ago by refusing to halt the assault of his army on rebel positions. Libyan airpspace is now closed to planes, and bombs of various kinds are raining down on the regime`s Army and its various facilities. The assault is apparently directed on military targets alone, and there are no plans of attacks on power plants, TV stations or other kinds of civilian infrastructure that had been commonplace during the NATO assault on Serbia more than ten years ago. This means that the military campaign is less costly than it could be in terms of public relations, and the coalition is easier to maintain, but it also means that it may be quite harder to achieve a decisive result inside Libya. One important result of this state of affairs is that the upward pressure on oil prices may be longer lasting than many traders would assume.
In Yemen, the last props of President Ali Abdallah Saleh`s government are crumbling as his own tribe calls him to step down, and a prominent general in the army defects to the rebel cause in the aftermath of bloodshed. It is unclear how many more leaders will sever their ties to the regime, what action they will take, and how high the risk of a civil war is in the country. But Yemen`s regime is agreed to be a highly corrupt, and an inefficient one even by the standards of the region, so support for it will not be very enthusiastic. Events are generating their own momentum, and with a few exceptions, risk of upheaval in Syria, Jordan, and other dictatorships in the region is rising with each passing day. This situation, in turn, should contribute to keeping gold, and oil, relatively supported for some time.
In Japan, the cost of rebuilding is expected to reach $250 billion over 5 years. Engineers are reported to have restored power to the nuclear facility but steam continued to leak from one of the reactors on Monday.
EURUSD stays above 1.41, USDJPY rallies strongly to beyond the 80 handle, while risk pairs such as the AUDUSD remain supported with a general market rally around the world. Speculators are convinced, it seems, that the nascent U.S. growth has a while to last in part because it is generated by fundamental dynamics, and in part because of the Fed`s support. We do not expect stock markets to suffer a long lasting collapse from now on, with the Fed`s clear commitment to inflating the economy, but volatility is surely to remain a major fixture of the scene for a long time to come.
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