The Global Markets Weekly – 1/24/14

Emerging markets shook the world last week, as an unexpectedly poor China PMI result—coming against a backdrop of steadily deepening financial-system concerns there and cumulating erosion in confidence regarding a number of other big developing countries—combined with newly dramatic political turmoil in Ukraine, Thailand, and Turkey to touch off a general flight of capital.[private]

Emerging-market stocks and bonds dropped and currencies weakened sharply, especially those of countries with the ongoing need for financing implied by big external imbalances.  Advanced-economy stock markets weakened too, in revulsion against risk and as export prospects were threatened.  The safe-haven dollar, yen, and U.S. Treasuries all strengthened.

So far, risks to the global financial system appear to be contained, though capital-lean European banks remain significantly exposed to emerging-market borrowers.  Certainly, the big central banks—with their much-expanded crisis knowledge and playbooks—are on alert.  However, their position is delicate—given the close monitoring that central banks now do, any significant moves they make could be read by markets as indicating that the situation is even worse than perceived.

•  U.S.: The event of the week is the January FOMC meeting (concluding Wed), with the decision to continue or pause tapering suddenly much less straightforward than it seemed to be. .
•  Eurozone:  The coming week has a wide array of data, including further updates on what seems to be clearly improving consumer backdrop, but perhaps the most important numbers will be the December Money Supply and Credit data (Wed) from the ECB..
• UK:  Recent comments and MPC minutes have very much shown how aware the BoE is that its forward guidance needs revisiting.  Regardless, Q4 GDP data (Tue) may help the BoE convince market that rate hikes are still some way off.
•  Japan: The week brings the major round of December economic indicators—helping nail down the fourth-quarter GDP performance, and giving an update on the BOJ’s battle to lift consumer price inflation. Starting at the beginning, important releases include the merchandise trade report (Mon), retail sales (Thu), the CPI (Fri), the Labor Force Survey (Fri), industrial production (Fri) and housing starts (Fri).
•  Emerging Markets/Regions:  In China, Official January PMIs will be on display this week (Fri), with expectations that industrial PMI will stay above the expansion threshold.  In India, the RBI, almost certainly, will not increase rates in this week’s (Tue) meeting. In Korea, December industrial production (Tue) likely improved, compared to the November (flat) result.  In Mexico, The BdeM meets (Fri).  It would be shocking, in view of the bank’s latest analysis and pronouncements, if policy rates were altered.  In Brazil, The key indicator is the unemployment rate (Fri), generally expected  to drop to a record low 4.4%, as the economy’s modest recovery continues.

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