Japanese Recession, Plunging Oil Hit U.S. Stocks

Investors are growing more fearful after Japan posts a larger than expected GDP contraction and oil falls to a 5-year low. 

The S&P 500 fell in early Monday trading after a strong end to last week as investors weighed the impact of a Japanese recession and falling oil. In a note to investors, UBS cited technological change and falling emerging market demand as potential threats to U.S. company growth, while some economists are wondering if consumer demand growth in the U.S. can offset global weakness.

Investors are growing more fearful after Japan posts a larger than expected GDP contraction and oil falls to a 5-year low. 

The S&P 500 fell in early Monday trading after a strong end to last week as investors weighed the impact of a Japanese recession and falling oil. In a note to investors, UBS cited technological change and falling emerging market demand as potential threats to U.S. company growth, while some economists are wondering if consumer demand growth in the U.S. can offset global weakness.

Japan posted an annualized decline in the economy of 1.9% for the third quarter, down from earlier estimates of a 1.6% drop. More analysts are warning of an acceleration of economic decline in Japan, driven by falling consumer spending. According to Taro Saito, Director of Economic Research at NLI Research Institute, Japan’s economic recovery will be “gradual” as the weaker yen benefits manufacturers and encourages exports.

Japan has seen exports to emerging markets fall over the past two years, with exports to the U.S. rising. In mid-2013, Japan exported more to the U.S. than to China for the first time since mid-2008. Further declines in exports to China are expected.

Japan Election Tests QE Resolve

Prime Minister Shinzo Abe has bet on quantitative easing to help the Japanese economy out of its current rut. While signs of improvement earlier this year have turned, PM Abe has asked for a referendum that will see the Japanese people deciding on whether to stay the course on weakening the yen to boost imports.

The yen has weakened considerably against the dollar, which is at historic highs against most currencies. The yen has fallen by over 15% in 2014 against the U.S. dollar, with most of those losses falling in late October after the Japanese government announced it would expand its QE program to as much as 70 trillion yen.

Japan will hold a general election on December 14, and Abe has said he is confident his Liberal Democratic Party will be victorious. The party’s approval rating has fallen from 40.2% in October to 36.6% in November, and Abe’s approval rating has fallen from 52% to 44% in the same time.

Despite the fall in approval rating, no other party is near competing with the LDP. The opposition Democratic Party of Japan has a 7.9% approval rating, up from 5.6% in the prior month. No party ratings or ratings of no confidence in any party rose to 40% in November, taking the majority for the first time since July.

Cheap Oil Becomes International Crisis

While Japanese political and monetary uncertainty clouds American markets, the impact of cheaper oil is bringing greater investor panic. While some economists believe cheaper oil could encourage more consumer spending, others worry that unprofitable oil operations in the country could trigger credit defaults that would ripple through the economy, while causing greater unemployment in the energy sector.

Additionally, more indications that cheap oil is impacting aggregate demand in Russia are frightening investors. Once popular hotspots for wealthy Russians are seeing a precipitous decline in visitors, with Dubai seeing nearly a double-digit decline in Russian visitors.

Many analysts have cut their forecasts for oil prices, with BNP Paribas slashing its formerly bullish expectations for WTI prices at $88 to $70. Morgan Stanley and Barclays have also cut their forecasts for oil prices.