A BAD TRADING WEEK - By WSS Research Desk
Long/Short Equity, Portfolio Strategy
Seeking Alpha Analyst Since 2008
By Carlos Guillen
This trading week started off on a rather negative note and has progressed into the worst week of losses in equity markets since the week of November 28, 2011, as investors continued to focus on China's slowing growth and its effect on emerging economies.
The losses posted this week have accelerated, as reflected by the Dow Jones Industrial Average, which is currently down over 200 points. U.S. stock are not alone, however, as equity markets around the world are taking a hit today, as weak Chinese data from yesterday created volatility in emerging-market stocks and currencies that has continued today and is pushing investors to flee for safer assets. As it stands, assets seen as safe havens continued to gain value. Gold futures are extending yesterday's rally to a two-month high. Treasury prices also gained further, with the 10-year Treasury note reaching a seven week high.
As we saw yesterday, Chinese manufacturing data showed the sector unexpectedly contracted in January. But the negative sentiment that this data sparked has not dwindled, and in fact it has turned into a fire as investors are now seeing headwinds for emerging markets. In particular, one worry is that many economies have begun to curtail quantitative easing actions, which now may have adverse consequences for their respective currencies.
All this instability comes at a time when stocks appear rather rich in value, and this gives more credence to the notion that a correction is imminent. Unfortunately, it is likely that we may see further stock declines as investors take some profits due to the heightened uncertainty.
China spooked the emerging market community yesterday with its negative manufacturing PMI reading, as it's obviously a big consumer of world raw materials and a key trading partner for emerging markets and the world economy at large. Certainly it's worth worrying about, although perhaps too early to start panicking given that it was just one month of slowdown while there's also the aspect of the upcoming Chinese New Year holiday that does tend to skew economic data this time of year.
Well, the emerging market investors are taking it a step further today, specifically currency traders. It may have been sparked by Argentina, whose central bank yesterday decided they would not allocate money to support their peso. Consequentially, the peso tanked by more than 15% against the dollar; Argentina took emergency measures today to allow for dollar purchases again, which had been banned since 2012, to regain stability in the currency market.
And now emerging market currencies are being put into the spotlight and the Fed is rearing its ugly head once again. The Fed is expected to continue winding down its QE program this year and that's got the currency traders sweating a little bit more today about an impending imbalance in the global currency markets that cheapens all the emerging markets' currencies against the benchmark dollar. It's all very speculative, really, but it's taking its toll at least for today.
Alongside the Argentinean peso, we have the Turkish lira down almost 7% against the dollar this month and diving to new record lows:
The South African rand fell approximately 1.1% today and is at its lowest point versus the dollar since 2008:
The Russian ruble hit a new record low against the euro, and the weakest value against the dollar in five years:
Of course, the worries about a Fed-induced global currency imbalance carry a whiff of conspiracy/doomsday mentality, and in reality it may just be part of the broader market selloff. Indeed, there is worry that world trade is in the midst of a slowdown and these are times when the naysayers start to come out of the woodwork.
The fact remains that in the grand scheme the market is still just barely off of the record highs and in fact you would be prudent to at least bag one or two profits. But it's far too early to begin to panic.
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