Market adjustment is not over yet

March 17, 2014

By Ian Campbell

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

The golden fear gauge is rising. Gold is up to a six-month high of $1,383 an ounce. A more serious equity and commodity meltdown threatens as markets grow more uneasy about Ukraine, China, emerging economies and global growth. Gold may go a bit higher still – but its rally too may soon prove vulnerable.

The fear begins in Ukraine. Russian stocks are down by 17 percent in the year to date as investors cast a get-me-out-of-here vote. In Asia, generally softer Chinese data is stirring fears of a slowdown. The latest tinkering with exchange rate policy, Saturday’s widening of its trading band, may take the yuan down further. That slide adds to the competitiveness worries in other emerging economies, as import demand in Europe remains weak.

The shift in sentiment on emerging economies has big implications. At first, EM fears pushed developed markets up. Now the damaging global impact of weaker EM growth is beginning to hit home. Last week’s developed market wobbles may be a harbinger of deeper falls.

In Japan, this fear is undoing policymakers’ efforts to devalue the yen and boost stocks. In troubled times, Japanese investors turn to bonds at home. The yen has broken higher while the Nikkei stock index is down to a one-month low. Japan’s already disappointing growth may suffer.

Western equity markets also look very vulnerable. European stocks have eased in the past two weeks but the Stoxx Europe 600 trades on 14 times expected earnings in the next 12 months, above its 10-year average of 11.9 times. And yet European growth is meagre, threatening earnings. The U.S. S&P 500 stock index set a new all-time record high on March 7, but has wobbled since.

The web of global economic weakness and fear looks good now for gold, the yen, the Swiss franc and safe haven bonds. And yet the yellow metal won’t get back to its old heyday. U.S. economic data has not been bad. The Fed looks reluctant to slow its tapering of asset purchases – even if global markets retreat.

Short term, that’s bad for risky assets. Long term, it suggests a firmer dollar and is bad for gold, too. Even the metal haven won’t be safe for long.

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