Eoin Treacy's view The first round of quantitative easing was initiated as a response to the failure of Lehman Brothers, the subsequent stock market crash and threat to global growth represented by extreme deleveraging. The perception of risk was such that a wide number of central banks acted in concert. They cut interest rates and increased money supply in an effort to protect the financial markets from collapse. It worked.

The result was that global growth leaders such as those in Asia and commodity producing Latin America found support in late 2008 and the markets most affected by the root cause of the problem in the USA and Europe bottomed in March 2009. Most US banks that received TARP funds have paid the money back and the stock market has rallied impressively over the last two years. It was also horribly expensive. Governments in the USA, much of Europe and China have been attempting to figure out a way to remove stimulus without interrupting growth.

Fragile US growth, continued weakness in the housing market and deflationary fears prompted the Fed to pursue another round of quantitative easing last year. It helped to fuel impressive gains on global stock markets and across the commodity complex. Soft commodities in particular benefitted from inward investment as a result of lower yields resulting from poor growing conditions in 2010. The US Dollar and Treasuries dropped as investors began to question how the US government's liabilities are going to be funded.

Since the beginning of 2011, political uncertainty across the Middle has raised anxiety levels. Food price inflation, long anticipated at Fullermoney, was one of the primary catalysts for the various Middle East uprisings. These events in turn spurred demand for energy assets and Brent crude hit $120 three weeks ago. The Japanese earthquake / tsunami further increased investor anxiety. It remains to be seen whether the Fukushima nuclear reactors can be managed without further mishap. This is an uncertain situation and we will not have conclusive evidence that the worst is past until the 20km exclusion zone has been lifted.

The Nikkei-225 closed down 10.55% today which might have been enough to shake the Bank of Japan out of its somnambulance. The Yen has rallied over the last two days at least in part because of the repatriation of funds and because of traders anticipating such a move. However, Japan's economy has taken a hit, a recession is threatened and the country is certain to rebuild. The Bank of Japan could sell foreign denominated assets to fund stimulus. This would put additional upward pressure on the Yen and offer an additional headwind to the country's exporters. The alternative would be to initiate its own quantitative easing program, actively pursue a weaker currency and promote growth and social cohesion. I believe the latter is the more likely prospect. The likelihood of the ECB, Bank of England or Fed raising rates in the short-term is also lower as a result of these events. Once panic subsides, risk assets globally could get a boost from another round of excessive capital creation, this time from Japan.

The bigger question is when this will occur? Sooner rather than later we can hope. This week's action on the Japanese stock market is climactic by any definition. The Japanese market has returned to the lower side of a more than 2-year range. An upward dynamic would help to confirm at least the beginnings of a return to demand dominance. From an investment perspective, the cautious investor might wish to wait for evidence that a bottom is forming before participating.

If we take a step back, food inflation, Middle Eastern regime change, oil prices, the Japanese tsunami have all had a debilitating effect on investor sentiment. While a number of previous overextended markets, such as those in Europe, have now almost completely reverted towards their means represented by their respective 200-day MAs, upward dynamics are required to indicate that demand is returning to at least short-term dominance. Wall Street appears more likely to have a ranging consolidation which will allow the MA to catch up.

Additionally, the headwinds offered by higher commodity prices are moderating as the appetite for risk has sated at least in the short-term. Food commodities have pulled back sharply and while not yet conclusive, oil prices have at least stopped going up.