In my blog at the start of the year I expressed concerns at the level of affection with which equity markets were being held in, too much greed and not enough fear, this meant investors were not well placed for shocks. The shock came on Friday as money flowed out of emerging currencies, after the slump in the Argentinian peso. The fear gauge had a big day as the Vix rose nearly 30%, the first signs of investor panic for a while.
The initial trigger for the latest bout of emerging market jitters was the weaker than expected Chinese manufacturing data on Thursday. History is littered with emerging market woes, impacting developed markets. Friday’s events mirror, to some extent, the events in Mexico In 1994. As John Authers reminds us in Saturday’s FT, the trigger that time was the US raising rates unexpectedly.
For a speculator, the expectation of domestic rates rising encourages them to return money home, as the rates they can receive in their home currency will improve, it does not pay so well to take the risk in overseas markets. Apart from the Mexican crisis of 1994, the other infamous emerging market wobbles over the past 20 years were the Asian crisis of 1997, and the Russian crisis in 1998. As one can see from the chart below, the impact is painful but generally short lived. The IMF and the world’s central banks step in quickly to calm the situation. To my mind the events of the past few days only goes to confirm my belief interest rates are going nowhere for some time yet.
At times like this, the debate will turn to concerns that the events of the past few days will be the catalyst for a bear market. I read a timely BCA Research report that highlights the possible triggers for bear markets. They quite rightly point out this analysis is not fool proof, but in my view works as a good indicator. They describe the four elements that flag a bear market, firstly monetary policy, secondly economic cycle, next valuation and finally technical indicators. In their view two of the four signals, namely monetary policy and the economic cycle remain positive for equities, whilst valuation and technical indicators are neutral. October 2007, all indicators flagged red and in December 2000, three out of four flagged negative.
The corporate earnings season continues apace this week, as well as plenty more macro data to digest. Amongst those events that analysts will focus on this week will be German business expectations on Monday. On Tuesday in the UK we get GDP data for q4 2013. Durable goods orders in the US as well as consumer confidence data is bound to cause headlines. On Thursday, we hear the final HSBC manufacturing PMI for China. Hopes will be for an upward adjustment.