Global Markets Update: Support Being Tested; + Asia’s Other Leadership Transitions

The break of 13,000 on the US Dow Jones has brought the index down to long-term support at 12,500, as we wrote in Business Monitor Online last week. In this risk-off environment, European equities and the euro are under pressure. The German DAX equity index has broken through support at 7,100, and we now envisage a further move down to major trendline support at around 6,600.

Similarly, the euro looks set to test our US$1.2500/EUR target following the clean break of support we flagged at US$1.2875/EUR. These moves signal that the European crisis is far from over and is in fact set to flare up anew, justifying our caution.

Meanwhile, the Japanese yen dropped to a seven-month low on news that Prime Minister Yoshihiko Noda has dissolved parliament for a general election in mid-December. This paves the way for the opposition Liberal Democratic Party (LDP) to return to power – which may lead to more expansionary monetary policy. While weakness may persist in light of these political uncertainties, we believe that structural factors in favour of yen strength are still in place over a longer-term horizon. Our preferred way of playing Japan has been the Topix equity index, which is testing trendline resistance at 750 – a break through which would suggest major potential upside.

Asia’s Other Leadership Transitions

Although the political spotlight in Asia has been on China’s leadership transition lately, there are two other such handovers ahead in the region, which will have economic and geopolitical importance.

As noted, Japan is gearing up for an early election on December 16, 2012, which is expected to restore the once-dominant LDP to power. However, the LDP, now led by former premier Shinzo Abe, will probably have to form a coalition, quite possibly with a couple of new parties led by former Tokyo governor Shintaro Ishihara and Osaka mayor Toru Hashimoto. Abe, Ishihara, and Hashimoto are all known to be strong nationalists, raising the spectre of further tensions with China.

Also highly significant is South Korea’s upcoming presidential election on December 19. President Lee Myung-bak cannot run for a second term, but his conservative Saenuri party’s candidate, Park Geun-hye, is the frontrunner. The two liberal opposition candidates, Moon Jae-in of the Democratic United Party and independent Ahn Cheol-soo, are currently seeking to decide which of them would be the standard bearer of the unified centre-left; only by uniting behind one of them can the opposition hope to defeat Park. All three are pledging to pursue a more moderate and reconciliatory policy towards North Korea, theoretically paving the way for improved relations. Regarding domestic policy, the candidates are pressing the perennial issue of reducing the power of the chaebol in the economy.

Full analysis on the politics and economy of Japan, South Korea, and North Korea, is available to subscribers of Business Monitor Online.

This Week’s Trivia Question

Last week, we noted that in the new James Bond film, Skyfall, Bond visits a casino in Macau. We asked: in which previous Bond film did he also visit Macau? The answer is The Man With The Golden Gun (1974). This week, retaining the theme of international espionage, and ahead of Barack Obama’s forthcoming visit to Yangon (Rangoon), we ask, which fictional global villain claimed that he was the son of a Belgian bakery owner and spent his childhood summers in Rangoon?