Stocks suffer worst January since 2010
By Dave Shellock
Friday 21:10 GMT. Global equities recorded their worst start to a year since 2010 as turmoil in emerging markets left nervous participants seeking safety in highly rated government bonds, the dollar and the yen.
At the close of New York trading, the FTSE All-World equity index was down 4.1 per cent since the start of 2014, its worst January performance since a 4.4 per cent decline four years ago. On Wall Street, the S&P 500 fell 0.7 per cent on the day at 1,782 – leaving it 3.6 per cent down over the year so far, its first monthly loss since August.
The CBOE Vix volatility index, a gauge of the cost of protection for equity portfolios, touched its highest level for more than three months this week.
The equity picture was a little less bleak in Europe, where a 0.2 per cent drop for the FTSE Eurofirst 300 on Friday left it with a year-to-date fall of 1.9 per cent – although in Tokyo, the Nikkei 225 shed 0.6 per cent on the day, taking its monthly fall to 8.5 per cent.
In contrast, gains for US and German government bonds drove benchmark 10-year yields – which move inversely to prices – to multi-month lows in both countries. The 10-year US Treasury yield was down 4 basis points on Friday at 2.65 per cent, a drop of 9bp on the week and a hefty 38bp on the month. The Bund yield ended the week at 1.66 per cent, down 6bp on the day and 28bp since the start of the year.
The mood of risk aversion in the markets intensified this week as central banks in India, Turkey and South Africa raised interest rates to counter increasing pressure on the currencies of all three countries, and offset the risk of rising inflation.
However, the policy makers’ actions had only limited success. and raised concerns in some quarters that they smacked of desperation. And EM concerns intensified as Chinese economic data signalled a contraction in factory output for the first time in six months – adding to concerns over the country’s economic outlook.
“In response to the recent tightening in Chinese credit conditions we believe data will stay on the soft side in the short term with a risk that they could fall more than expected,” said analysts at Danske Bank.
“The correlation between EM assets and Chinese data has been very high for some time and the slowdown in China may actually be the main reason for the renewed turmoil.”
A further factor behind the latest sell-off in EM assets was widely seen to be the Federal Reserve’s continued withdrawal of liquidity.
The US central bank this week announced a further $10bn reduction, or “tapering”, of its monthly asset purchases to $65bn – as expected – but made no reference to the recent market turmoil. “Given that past crises in emerging markets have rarely had more than a temporary impact on US financial markets, we think the Fed made the right choice,” said Paul Ashworth at Capital Economics.
“Problems will flare up periodically this year in different emerging countries, but that won’t stop the Fed from continuing to taper.”
Indeed, data this week showing that the US economy had grown at an annualised pace of 3.2 per cent in the last quarter of 2013 appeared to offer some validation to the Fed’s decision to begin withdrawing its stimulus measures.
The broadly encouraging tone of recent US data releases – which many expect to continue, and keep the Fed’s tapering programme on track – plus a growing desire to avoid risk, helped push up the dollar this week as it closed out its best month since May.
The dollar index, a gauge of the currency ’s value against a weighted basket of counterparts, rose 0.9 per cent this week and was up 1.5 per cent this month.
The yen also continued to attract buying from nervous investors. The dollar was little changed against the Japanese unit over the week at Y102.15, but has risen about 2.5 per cent since the start of the year.
But the euro has begun to come under pressure from renewed speculation that the European Central Bank could cut interest rates again. The single currency was down 1.5 per cent against the dollar over the course of the week at 1.3486. It traded above $1.38 on the last day of 2013.
“While recent surveys suggest that the euro area’s economic recovery stepped up a gear at the start of 2014, a downside surprise to the flash estimate of inflation in January has raised significantly the chances that the ECB will cut rates again in the present quarter,” said Chris Scicluna at Daiwa Capital Markets.
The latest bout of market jitters did little to bolster gold this week. The metal was flat on Friday at $1,244 an ounce and down $28 over the week – but still up $35 so far this year.
By Dave Shellock
Friday 21:10 GMT. Global equities recorded their worst start to a year since 2010 as turmoil in emerging markets left nervous participants seeking safety in highly rated government bonds, the dollar and the yen.
At the close of New York trading, the FTSE All-World equity index was down 4.1 per cent since the start of 2014, its worst January performance since a 4.4 per cent decline four years ago. On Wall Street, the S&P 500 fell 0.7 per cent on the day at 1,782 – leaving it 3.6 per cent down over the year so far, its first monthly loss since August.
The CBOE Vix volatility index, a gauge of the cost of protection for equity portfolios, touched its highest level for more than three months this week.
The equity picture was a little less bleak in Europe, where a 0.2 per cent drop for the FTSE Eurofirst 300 on Friday left it with a year-to-date fall of 1.9 per cent – although in Tokyo, the Nikkei 225 shed 0.6 per cent on the day, taking its monthly fall to 8.5 per cent.
In contrast, gains for US and German government bonds drove benchmark 10-year yields – which move inversely to prices – to multi-month lows in both countries. The 10-year US Treasury yield was down 4 basis points on Friday at 2.65 per cent, a drop of 9bp on the week and a hefty 38bp on the month. The Bund yield ended the week at 1.66 per cent, down 6bp on the day and 28bp since the start of the year.
The mood of risk aversion in the markets intensified this week as central banks in India, Turkey and South Africa raised interest rates to counter increasing pressure on the currencies of all three countries, and offset the risk of rising inflation.
However, the policy makers’ actions had only limited success. and raised concerns in some quarters that they smacked of desperation. And EM concerns intensified as Chinese economic data signalled a contraction in factory output for the first time in six months – adding to concerns over the country’s economic outlook.
“In response to the recent tightening in Chinese credit conditions we believe data will stay on the soft side in the short term with a risk that they could fall more than expected,” said analysts at Danske Bank.
“The correlation between EM assets and Chinese data has been very high for some time and the slowdown in China may actually be the main reason for the renewed turmoil.”
A further factor behind the latest sell-off in EM assets was widely seen to be the Federal Reserve’s continued withdrawal of liquidity.
The US central bank this week announced a further $10bn reduction, or “tapering”, of its monthly asset purchases to $65bn – as expected – but made no reference to the recent market turmoil. “Given that past crises in emerging markets have rarely had more than a temporary impact on US financial markets, we think the Fed made the right choice,” said Paul Ashworth at Capital Economics.
“Problems will flare up periodically this year in different emerging countries, but that won’t stop the Fed from continuing to taper.”
Indeed, data this week showing that the US economy had grown at an annualised pace of 3.2 per cent in the last quarter of 2013 appeared to offer some validation to the Fed’s decision to begin withdrawing its stimulus measures.
The broadly encouraging tone of recent US data releases – which many expect to continue, and keep the Fed’s tapering programme on track – plus a growing desire to avoid risk, helped push up the dollar this week as it closed out its best month since May.
The dollar index, a gauge of the currency ’s value against a weighted basket of counterparts, rose 0.9 per cent this week and was up 1.5 per cent this month.
The yen also continued to attract buying from nervous investors. The dollar was little changed against the Japanese unit over the week at Y102.15, but has risen about 2.5 per cent since the start of the year.
But the euro has begun to come under pressure from renewed speculation that the European Central Bank could cut interest rates again. The single currency was down 1.5 per cent against the dollar over the course of the week at 1.3486. It traded above $1.38 on the last day of 2013.
“While recent surveys suggest that the euro area’s economic recovery stepped up a gear at the start of 2014, a downside surprise to the flash estimate of inflation in January has raised significantly the chances that the ECB will cut rates again in the present quarter,” said Chris Scicluna at Daiwa Capital Markets.
The latest bout of market jitters did little to bolster gold this week. The metal was flat on Friday at $1,244 an ounce and down $28 over the week – but still up $35 so far this year.