In this regular series of weekend blogs on the major events in the world of global macro, the last blog of the month will reflect on the main themes of the whole month, not just the latest week. In January, rising inflation risks in the emerging markets dominated market behaviour and worries about unrest in the Middle East,and the wider impact of higher agricultural prices, replaced the European sovereign debt crisis as the main concern for global markets. Global equities and bonds were little changed during the month, but developed markets out-performed the emerging world. Global and US activity indicators remained encouraging, but the Fed showed no signs of an imminent change in its policy stance. Next week will see the publication of the US ISM and employment data, and the markets will doubtless stay focused on events in Egypt.
This month, I learned that:
1. The emerging markets can go down as well as up. Political risk stemming from events in Egypt is the dominant concern as the month ends, but deeper economic forces are also causing concern in emerging markets. In the past two years, if not for much longer than that, it has been taken for granted that the growth rate in the emerging economies would remain robust, while the performance of the US , Europe and Japan was subject to much greater risk. All of this is still true, over the long term. But, in January, the markets decided that they had become over-confident about the immediate future in the emerging world, mainly because rising agricultural prices led to concerns not only about about political stability but also about the prospects for monetary policy in many emerging countries. 
This is likely to remain an important issue for markets throughout 2011. If monetary policy in the BRICs and other emerging economies is tightened too much, then emerging equities may have a disappointing year, relative to their developed market counterparts. If, on the other hand, there is insufficient monetary tightening in the EMs, then bubbles could develop in their equity and property markets. In January, the markets leaned towards the former view, so many of the most important equity markets in the emerging bloc, including India and China, fell sharply, even before Egypt took centre stage.
This is likely to remain an important issue for markets throughout 2011. If monetary policy in the BRICs and other emerging economies is tightened too much, then emerging equities may have a disappointing year, relative to their developed market counterparts. If, on the other hand, there is insufficient monetary tightening in the EMs, then bubbles could develop in their equity and property markets. In January, the markets leaned towards the former view, so many of the most important equity markets in the emerging bloc, including India and China, fell sharply, even before Egypt took centre stage.
No comments:
Post a Comment