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Stocks

Uncertainty looming in Russia, US, Europe

TOKYO -- Tokyo stocks rose again Friday as worries over the plunge in crude prices eased on growing confidence in U.S., European and Japanese monetary policies. But the market outlook for 2015 is fraught with uncertainty as not just oil-producing countries but Europe and the U.S. face their own sets of political and financial risks.

     "The market correction is probably not yet over," said Kenichi Kubo, a senior fund manager at Tokio Marine Asset Management, referring to crude oil futures.

     He has been closely watching crude futures as a key indicator. Speculative buy positions have decreased by some 40% from a peak in June, according to the U.S. Commodity Futures Trading Commission. But this is still about 60% higher than at the end of 2010, even though crude oil prices have fallen back to 2009 levels. "The possibility of another decline [in the price of crude] cannot be ruled out," Kubo said.

     The U.S. Federal Open Market Committee, which met this week, assured the financial market that it will not act in haste to raise rates. This has helped contain market turmoil triggered by the plunge in the ruble.

     Russia's foreign currency reserves are larger than the debt it owes to overseas creditors. And Venezuela, another oil-producing country hit by crude's tumble, has enough funds to keep up with debt payments for a year. "If crude prices pick up in half a year or so, a crisis can be avoided," says Yoshio Takahashi of Barclays Securities Japan.

     But as was the case in the European financial crisis, market risks are often underestimated in the beginning. Greece's national debt stood at $460 billion in 2011, less than Russia's $680 billion. But the decline of Greek government bonds spread to the debt markets of four southern European countries.

     And in the U.S., credit risks in the energy sector could potentially cause trouble. The shale gas boom in the country is partly a result of easy credit that enabled companies with low creditworthiness to raise money via leveraged loans and high-yield corporate bonds to fund their projects.

     The balance of low-rated bonds issued by American energy companies stands at $200 billion or so, still less than the $1.4 trillion subprime loan balance of 2007. But issuance of collateralized debt obligations, which exacerbated the financial crisis of 2008, has been on the rise again.

     In Europe, meanwhile, political instability is a concern. In Greece, a radical left coalition may seize power in the general election slated for early next year. In the U.K., the ruling coalition may lose in the May election, further complicating the 2017 referendum on a U.K. exit from the European Union, says Kenichiro Yoshida of the Mizuho Research Institute.

     Many investors expect that low oil prices will curb energy costs worldwide and the U.S. economic recovery will absorb the impact of a U.S. interest hike on emerging markets. But that outlook may be overly rosy given the many risk factors at play.

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