The sub-prime mortgage situation is continuing to create unrest in equity markets with the uncertainty surrounding the scale of the lending issue prolonging the markets’ insecurity.

In the US, the S&P 500 has fallen over recent weeks to the extent that it has now given up the gains achieved in 2007 to stand at 1,416.77, a loss of 0.1% for the year to date.

Asian stocks have also declined with the MSCI Asia Pacific Index falling to its lowest level for two months on the back of concern that the loans crisis will slow economic growth.

In Japan, the Nikkei 225 was standing at 14,888.77, some way off the levels of over 18,000 achieved some weeks ago.

Japan’s economic performance has been under the spotlight as commentators question whether it has undergone another false dawn. However, there has been comment that talk of a bear market in Japan may be out of line with the outlook for corporate profits.

Repeatedly, it has been suggested that the world’s second biggest economy has been on the cusp of a market upsurge with economic fundamentals showing signs of creating the right environment for sustained growth, but it has failed to produce consistent performance.

There was strong optimism about the country’s prospects at the start of 2006 following impressive growth during 2005. However, the last eighteen months have not lived up to expectations. While exports have remained strong, domestic wages and spending have been weak in spite of comment in the past that the domestic element of the economy was showing signs of improvement.

In spite of this, some analysts are reportedly positive about Japan once again. There are reports that Japanese companies and the public have been strong purchasers of domestic equities, which has been put forward as an indication that Japanese investors think the country’s shares are undervalued. There is also a view that the country is slowly emerging from deflation and that companies could deliver aggregate earnings growth of 10% this year and next.

While there is some concern that the sub-prime crisis will have an impact in a number of Japan’s export markets, the increasing prosperity of some economies, most notably China, means consumer goods exports, particularly electronics, should remain strong, leading some analysts to have a more positive outlook on Japan’s prospects.

Turning to oil, having reached USD99.29, the price of a barrel of crude has fallen to USD97.42 on the back of increased shipments and the prospect that slower economic growth in the US may reduce demand.

Meanwhile, the dollar has fallen to USD1.4856 per euro, the weakest since the single European currency’s debut in 1999. The US currency has also fallen to Yen109 for the first time in more than two years on concern widening credit-market losses and record fuel costs will slow US economic growth.

 

David Findlay

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