Renewed inflation concerns and undeniable unemployment pressure pushed the euro below the $1.35 USD mark and to a two-month low against the yen. Consumer price inflation fell back to 0.7 percent, a rate hit last October, and below December’s 0.8 rate. The rate is well below the ECB’s target of 2.0 percent and may necessitate tightening by the central bank as early as next week.

In the euro zone, the cost of food, alcohol and tobacco has increased by 1.7 percent in 2014 but is more than offset by significant cost reductions in energy prices, down 1.2 percent. Europe’s biggest economy, Germany, saw consumer prices decline by 0.7 percent in January.

Combined with a report from the European Commission that indicated there remain 19 million euro zone workers unemployed, the currency came under heavy pressure. With the regional unemployment rate exceeding 12 percent for the third consecutive month, prospects for a recovery are limited. The lack of a central stimulus program to incentivize employers has left profitable regional enterprises playing it close to the vest and building capital reservoirs.

Huge Outflows from Markets

Emerging equity and bond markets have fallen prey to large scale outflows, a trend that has momentum. In the last week, more than $9 billion was withdrawn from emerging equity markets putting central banks under extreme pressure. According to EPFR Global, the outflows represent the largest flight to safety in 2.5 years.

Emerging market equity funds suffered losses of more than $6.3 billion in the week ending 01-29-14, marking the largest outflow since August, 2011. Emerging equity funds have seen more than $12.2 billion exit the system in 2014 alone. This compares to $15 billion in all of 2013.

Outflows to debt funds have also been approaching historic highs. Outflows in 2014 have topped $4.6 billion compared to $14.3 billion in all of 2013.

The MSCI global index fund has lost 6 percent in January. Emerging bond yields are under heavy pressure, but the damages are not confined solely to emerging markets. Developed economy debt funds have also shown weakness with $5 billion exiting market in the month.

Political Tensions

The continued and expansive tapering by the Federal Reserve is have an unfavorable response by emerging economies. India, in particular, has blamed the US policy for global currency pressure. While weakness permeates emerging and Asian economies, Europe and Latin America are also fragile.

India has suggested that Ben Bernanke and the Federal Reserve have acted irresponsibly. The IMF has warned central banks to “remain vigilant over liquidity conditions.”

In Asia, concerns about China are underscoring the fragile regional marketplace. A slowdown in China’s manufacturing could have disastrous effects on the country’s Asian trading partners. The People’s Bank of China may have to intervene to quell concerns.

In Europe, Hungary was forced to halt a T-bill auction after a 67 basis point spike. Poland postponed release of its monthly debt supply report due to revisions to the country’s pension plan. The Polish 10-year bond rose 10 basis points on Thursday.

But, the troubled Russian rouble remained at the centre of a potential crises. After a brief Thursday rally, the rouble fell 1 percent to new five-year lows.

Pairs Worth Noting

Euro – USD – 1.3501 (-0.40)

Euro – Yen – 138.1020

USD – Yen – 102.29 (-0.41)

GBP – USD – 1.6455 (-0.18)

USD – CAD – 1.1122 (-0.30)

USD – RUB – 35.1093

Euro – RUB – 47.4709

Tags: ben bernanke, Canadian Dollar, ECB, Emerging Economies, EPFR, Euro, Euro Zone, euro zone infation, Euro zone unempoloyment, european commission, Federal Reserve, Hungary, India, Ltin America, MSCI, People's Bank of China, Poland, Russia Rouble, usd, yen

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