The Financial Storm Will Also Engulf the Yen   

• Global stock markets appear to have entered the next downleg of the bear market on a growing US debate about the temporary nationalization of Citigroup and/or Bank of America. Stock prices of both companies already reflect what investors believe will happen.
• With the financial crisis still raging, global investors are flocking to gold as the only haven against imploding bank stocks, the apparent inability of banking regulators to a turn the tide, and the inevitable debauching of fiat currencies (including USD,Euro and JPY) as governments try to reflate their way out of the crisis. Global trading in gold was already up 58% to over $20 trillion in 2008.
• Japan's 4th QTR '08 implosion has foreign investors wondering if Japan might not have already slipped into depression. Yet the yen is still apparently considered a "safe haven" currency. After having appreciated by a record amount in 2008 on massive yen carry unwinding, the JPY index is now breaking down below its 50-day MA. After seasonal fund repatriation demand ahead of the March-end accounting year passes, we see the the yen heading back under JPY100/USD by the end of 2009.
• Historically, bear market movements in Japan have come in three waves, and the next downleg in the Nikkei 225 could take the index to around 5,850, or some 20% lower than present. But the Nikkei 225 probably has less potential downside than the US and European stock markets until the next phase of the financial storm passes. One hint of the Nikkei's relative resiliency was the market's muted reaction to the horrible Q4 2008 GDP numbers, which indicate that this was already largely anticipated in the October 27 2008 low.
• This however is of little solace to absolute return investors. The one sliver of good news is that a modest recovery in Asian shipping rates as well as basic crude oil materials continues, while the Chinese government is forcing a massive increase in liquidity that is bound to spill over into Chinese stocks. To us, this looks like a trading opportunity in shipping indices, iron ore exporters, shipping companies and China stocks.

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