By David Gaffen
(Reuters) – Growth picked up in the dominant U.S. service sector in January, with steady strength in private-sector hiring, suggesting the U.S. economy was digging through the winter weather that socked the country over the last several weeks.
After two months of slower growth, the Institute for Supply Management said on Wednesday its services index rose to 54 last month from 53 in December, and firms added workers at the fastest clip in more than three years.
Monday was the worst day in the stock market since June. And while you can go through all the machinations and point out that the market is still down just 5 to 6 percent from its record high – and you’d be right – that doesn’t really translate to a strong environment at this time.
Not when the selloff continues through to overseas markets, with the Nikkei down 4 percent, Hong Kong losing more than 2 percent and ending at the day’s lows, and Europe down as well. So far the US market is experiencing something of a dead-cat bounce, but we’ll see how long that can last.
On Thursday, this column suggested that a bunch of stock markets selling off in tandem did not satisfy the definition of contagion. Central banks dumping U.S. assets, weak auctions of government debt in seemingly less related countries, and big sell offs in less affected currencies? That’s getting closer to the mark.
Foreign central banks cut their holdings of U.S. debt stored at the Federal Reserve by the most in seven months in the past week, in a bid to defend weak currencies. “It makes sense,” said Scott Carmack, fixed income portfolio manager at Leader Capital, which has $1 billion under management. “It will probably continue as emerging markets try to prop up their currencies.”
So, it’s been a few days. Which means the markets have hit that point in the Star Trek episodes when the Klingons were temporarily short of torpedoes, which gave the Enterprise crew time to suss out what was going on.
Some of the missiles were fired. Big rate hikes from Turkey and South Africa, that followed a rate hike from India, and a few conclusions are inescapable:
The messy sell-off in emerging markets was stemmed overnight after Turkey surprised everyone by raising rates to 12 percent – but it didn’t last. Major averages in Britain and Germany opened at their highs of the day but have since faded, and even though the big rate increases in Turkey, South Africa and India are meant to stem capital flight, so far the market’s shooting first and asking questions later. S&P futures were up about 20 points after the Turkey rate hike – an odd move for such a localized event – and we’re seeing the reaction now, which, to quote Tom the cat about the ‘white mouse no longer being dangerous,’ “DON’T…YOU…BELIEVE…IT.” So we’re lower, and continue to head lower, and for those of you new to the markets, this is what’s called a selloff.
The big question: Will the Federal Reserve defer its tapering campaign in recognition of emerging-markets difficulty? One could say the Fed cannot be expected to act as the underwriter for global risk-taking, but you’d be laughed out of the room, given the performance of assets around the world in the last several years as the Fed went into full-QE mode.
In the words of Inigo Montoya, let me explain. No, there is too much. Let me sum up.
The market’s most immediate issues remain tied specifically to what’s going on overseas, particularly in Turkey. There, monetary authorities are meeting on a potential interest rate hike as a way of getting on top of the inflation problem (inflation’s at 7.5 percent, and the central bank’s lending rate is, uh, 7.75 percent).
It takes a lot to overshadow the heart of earnings season and a Federal Reserve meeting but the rout in emerging markets has managed to make that happen. This week is an important one. As my Reuters London colleague Mike Dolan pointed out, it will go a long way toward determining whether this is a rapid hot-money flight that gets stemmed after a brief correction or the start of a prolonged rout.
Fund withdrawals in recent weeks have shown a steady pullback from the emerging markets, though strategists at Bank of America-Merrill Lynch believe a “contagion” point hasn’t been reached yet – that would take several more weeks of similar outflows. It remains to be seen whether that will happen or not.
NEW YORK/LONDON (Reuters) – A full-scale flight from emerging market assets accelerated on Friday, setting global shares on course for their worst week this year and driving investors to safe-haven assets including U.S. Treasuries, the yen and gold.
U.S. stocks slumped, putting the benchmark S&P 500 on track for its worst drop since November 7 and pushing the index down 1.8 percent for the week. Concerns about slower growth in China, reduced support from U.S. monetary policy and political problems in Turkey, Argentina and Ukraine drove the selling.
The contagion is building. Major world markets are taking it on the chin, U.S. stocks have slumped, and major asset managers in Europe are seeing shares fall, with some citing corporate exposure to emerging markets in general and Spanish exposure to Latin America in particular.
Safe havens – from Treasuries to gold to the yen and Swiss franc – are way up. And really, while specific country issues are in play here, (Argentina is, well, Argentina), the removal of liquidity on one side of the world and a slowing economy on the other is enough to shake out some long-held notions of what’s going to be the environment.
The parade of earnings releases continues Thursday, with bellwethers ranging from McDonald’s to Microsoft on tap. Discount airline Southwest was out before the bell, and Starbucks, Intuitive Surgical and Federated Investors are all due after the closing bell.
The technology industry’s equivalent of a boring utility, Microsoft is more of a candidate for lively activity this time around, as the software giant looks for a new chief executive, a task many investors had expected to be done by now. The company’s sales of its Windows product are expected to have been weak in the fourth quarter and its new Xbox also left some people nonplussed.