Extreme turbulence in the emerging market economies slammed stocks on Friday.
The consequences from the tapering of the Federal Reserve’s monthly bond purchases became grossly apparent on Friday. The fact that the taper coincides with China’s economic slowdown is making the situation worse for emerging market economies. When Friday’s trading session sent stocks falling from their nearly record-high levels, commentators immediately focused their attention on the January FOMC monetary policy meeting, which is scheduled for Tuesday and Wednesday.
Will the FOMC decide to trim another $10 billion from its monthly bond purchases at next week’s meeting? Two weeks ago, most people would have answered in the affirmative. After what happened to global stock (and currency) markets on Friday, a good deal of commentary has been focused on the issue of whether the FOMC will (temporarily) reverse its initial $10 billion cutback.
Although Philly FedHead Charles Plosser and Dallas FedHead Richard Fisher can be expected to vote for more tapering, they might be the only FOMC members to do so. Kansas City FedHead Esther George is not a voting member this year. In her place is the “dovish” Narayana Kocherlakota from the Minneapolis Fed. Wednesday could be an exciting day for the stock market. Another $10 billion cut will likely bring a stock market swoon. A reversal of the initial $10 billion cutback could send the S&P 500 to 1,900.
The Dow Jones Industrial Average (DIA) lost 318 points to finish Friday’s trading session at 15,879 for a 1.96 percent decline. The S&P 500 (SPY) sank 2.09 percent to close at 1,790.
The Nasdaq 100 (QQQ) dropped by exactly two percent to finish at 3,541. The Russell 2000 (IWM) sank 2.41 percent to end the day at 1,144.
In other major markets, oil (USO) declined 0.40 percent to close at $34.58.
On London’s ICE Futures Europe Exchange, March futures for Brent crude oil advanced 34 cents (0.32 percent) to $107.92/bbl. (BNO).
February gold futures advanced $7.00 (0.56 percent) to $1,269.30 per ounce (GLD).
As for what happened to the transportation sector on Friday, although there is an analogy which could be made to a recent news report, I will resist the temptation to do so because it would be inappropriate. The Dow Jones Transportation Average took a 4.11 percent nosedive from Thursday’s record-high close (IYT).
In Japan, the exchange rate for the yen continued to be the dominant factor in stock market activity. Japanese stocks faded as the yen strengthened to 103.11 per dollar during Friday’s trading session in Tokyo. A stronger yen causes Japanese exports to be less competitively priced in foreign markets (FXY). The Nikkei 225 Stock Average sank 1.94 percent to 15,391 (EWJ).
The country which started Friday’s global economic bloodbath actually saw its stocks advance on Friday. Thursday’s release of the HSBC Flash China Manufacturing PMI (which hit a six-month low of 49.6) sent a panic signal to emerging market nations which rely in China to buy their own exported commodities and raw materials for manufacturing.
The bad news about China’s manufacturing crushed the exchange rates for emerging market currencies on Friday, sending the yen higher and sinking Japanese stocks, while creating anxiety in the United States about the consequences from the next round of tapering by the Federal Reserve. Nevertheless, the Shanghai Composite Index climbed 0.60 percent to 2,054 (FXI) as money market rates continued to fall after the People’s Bank of China pumped a $42 billion liquidity injection into the nation’s economy on Tuesday. Hong Kong’s Hang Seng Index sank 1.25 percent to 22,450 (EWH).
In Europe, stocks took their steepest fall in seven months as investors fled to “safe haven” investments, such as gold and United States Treasuries, as a result of the economic chaos in the emerging markets. The Euro STOXX 50 Index took a 2.85 percent nosedive to 3,028 – crossing below its 50-day moving average of 3,058. Its Relative Strength Index is 39.00 (FEZ).
Technical indicators revealed that the S&P 500 crossed below its 50-day moving average of 1,812 after sinking 2.09 percent to finish Friday’s trading session at 1,790. Its Relative Strength Index dropped from 50.32 to 36.82, creating the possibility that the S&P 500 could fall from “overbought” to “oversold” within a 30-day span. The MACD is taking a steep dive below the signal line, which would suggest that the S&P could continue to decline during the immediate future.
On Friday, all sectors were solidly in negative territory. Surprisingly, the consumer staples sector was the only member of the group to fall less than one percent.
Consumer Discretionary (XLY): -1.92%
Technology: (XLK): -1.93%
Industrials (XLI): -3.11%
Materials: (XLB): -2.68%
Energy (XLE): -2.09%
Financials: (XLF): -2.27%
Utilities (XLU): -1.12%
Health Care: (XLV): -2.35%
Consumer Staples (XLP): -0.91%
Bottom line: On Friday, emerging market economies reached the intersection where the Federal Reserve’s taper met China’s economic slowdown, leaving nearly-worthless emerging market currencies spilled all over the pavement. As a result, the Japanese, European and American stock markets experienced heavy selloffs.