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.
The week opened with the earnings of a number of high-profile corporate names that disappointed investors. Most notable of these was International Business Machines, which really ought to be called International Buyback Machines, given Big Blue’s penchant for driving earnings through financial engineering rather than, y’know, the real kind of engineering.
IBM fell short on revenue estimates, saw shrinking demand in part because of reduced government spending (China’s government, not the US), yet exceeded net income estimates because of – what else – a lower tax rate, now at 11 percent vs 14 pct a year ago.
The week brings a slew of earnings, and then anticipation of the following week, which will bring the Federal Reserve’s last meeting chaired by Ben Bernanke, with media reports already starting to concentrate on the Fed and look past results a bit.
That’s a mistake, of course – the outlook for corporate America vs. a predetermined outcome from the central bank is a no-brainer – but the Fed’s continued exit underpins the shifting sentiment in the market right now.
The first couple of weeks of the year have caused some investors to examine the hyper-bullishness that closed out 2013 – the most successful year for equity-market investing in more than 15 years. Still, a few weeks of softness this year didn’t stop the S&P 500 from hitting a new record Wednesday, however briefly.
Short of the perma-bears, who only see the market as a walking disaster, some notes of caution have rung from those who expect stocks to continue higher, yet struggle through what’s been a mixed start to earnings season.