Highly Worrisome Developments Characterize This Week

by: Oguz Erkol

Last week Europe and China posted lower than expected PMIs and oil prices were highly volatile. These all supported the pessimistic viewers' global recession scenario. And what is more, the Bank of China did not pretend to run a new easing monetary policy. Therefore, we saw the biggest loss in European and Asian markets last week since the beginning of 2012. While oil prices and the dollar index are increasing, investors decided to realize their profit.

I think the most important event of this week is the BRICS meeting which will take place in New Delhi (the first ever meeting hosted by India) on Mar 29. Participants of this meeting will probably intend to unseat the US dollar as the preferred worldwide currency for trade and investment in emerging economies. The move is set to challenge the supremacy of the US dollar. They are also targeting to establish "BRICS Development Bank" to finance other emerging countries' economic activities. This a big threat for the US dollar while these countries are one step closer not to prefer the US dollar for trade.

On Friday, the Euro Area Finance Ministers are coming together. We will see if Germany will reject the combining of the European Financial Stability Foundation and the European Stability Mechanism. Germany may have an ace in the hole, if Spain does not approve the austerity measures, unlike the markets' wishes.

Fatih Birol, who is the Chief Economist of the International Enery Agency, said high prices could put pressure on central banks to raise interest rates, especially in more developed countries such as the UK. He also said that the US economy has no defensive tools against the surge in oil prices and I think this is why the Fed leaves the impression of a tightening to come much more earlier than expected. On the other hand, Federal Reserve Bank of Atlanta President Dennis Lockhart said that the central bank must be careful not to tighten monetary policy prematurely or inadvertently. "Another round (or two) of quantitative easing from the Federal Reserve, muted growth and an end to the 30-year bull run in government bonds," is what Bill Gross, one of the largest bond investors in the world, sees for the US economy.

We also saw some bad news from the indebted Euro Area countries after "the Greek Escape". According to a new report by the Central Bank of Ireland, the economy still remains fragile and faces significant risks on the road to recovery. Ireland's ability to pay back its debt could also be threatened by ongoing weak economic growth.

The new week is full of highly worrisome developments.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.