Sales in global markets will continue, the ECB decision and U.S. employment figures will give direction to the markets in general.
Signals regarding the slowdown in the Chinese economy, the Fed's Quantitative Easing exit maintained and the crises in a number of developing countries in world markets and in particular in Turkey, have created a nightmare in the true sense of the word. While all the share indices have closed the week with a loss, the U.S. bonds have seen their premium rise due to the flight to quality. The financial press over the weekend was filled with prophecies of similar crises like the ones in the 1990s regarding the Emerging Markets. One can only ask whether the world is heading to a new crisis? When will this nightmare take an end?
In fact, we are paying the price of the unlimited money printing performed by the Fed, BoJ, BoE and in a limited way by the ECB for the last five years. With the exception of BoJ, once it has been seen that the central banks will no longer print money, a rush escape from the developing countries which had benefited enormously from this endless liquidity has started. Already, the perception that the developing countries failed to grow as well as the upcoming elections and the political crises in most of these countries had shattered the morale, then the shocks from China and the Fed came along.
We do not have any worries concerning the Wall Street and other stock exchanges of the developed countries. With strong economic growth and high interest rates which are still too low will permit these exchanges to overcome the crisis in a short time. Based on a simple calculation, we can expect the S&P 500 to drop no further than 5% in a worst-case scenario.Unfortunately, we are a bit more pessimistic about the developing countries as a whole. According to Goldman Sachs, the process of adapting to the new era of foreign exchange and interest rate is not yet complete. MSCI of the developing countries may lose 10% more of its value.
This week, we shall see the continuation of the selling of riskier assets. While the U.S. economy will be accelerating in terms of growth, the main concern will be the speeding up of the exit from the quantitative easing by the Fed. the ISM indices which will be published this week and the January non-farm employment figures which will be released on Friday are also important.The December revisions and in the event that the figures of January exceed 250000, one may experience a panic sale in the Wall Street but after that, people will look at the strengthening growth.
As far as the European Union is concerned, unlike the estimate of the majority, we do not expect the ECB to lower its interest rates this week. While we will see the weakening of the EUR/USD, we may experience some sales in the Stoxx600 until strong profits are issued.
Regarding the developing countries, the global PMI indices which will be released during the week are also very important. If in the second half of January, despite the shock, the acceleration in economic activity persist, the assets of the developing countries' markets can survive the crisis.
We are absolutely certain that the world is not on the brink of a new crisis. We are in a transition phase which is going to end with the Fed's shock interest hike due in 2016. During this period, all the financial assets will be repriced. In the process, it is very probable that the U.S. dollar and the U.S. bonds' interest rates will rise while commodities, gold, euro and yen will depreciate. This process will be painful for the developing countries but with a few exceptions such as Turkey, there are no imbalances similar to the 1990s which will drag the economies into the abyss. We consider that the scenario regarding a strong growth is still firm despite the currency and interest rate shocks. In the event that the prices of the developing countries' assets drop further (say between 10 % and 30%), we believe that a strong buy will definitively start.
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