According to a report from the Wall Street Journal,jitters about China, the meltdown in the Turkish lira, violent protests in Ukraine and the plummeting Argentine peso—underlaid with continuing nerves about the withdrawal of U.S. monetary stimulus—have all combined to hit risk appetite. The problems aren't particularly new and don't have much in common, but the combination is proving toxic.
The biggest repercussions have been in the foreign-exchange markets, where even currencies of countries with relative fundamental strengths, such as the Polish zloty and the Mexican peso, have started to show signs of strain. Pressures have also emerged in asset classes that have so far remained resilient, such as U.S.-dollar-denominated emerging-market bonds. That will understandably make investors nervous.
But some of the concerns may ease. China is seeking to shift from an economy led by investment to one driven by consumption. This is such a vast and complex process that worries about how it is progressing will be with us for a long time yet. The small dip in the Flash HSBC Chinese PMI that some cite as a key reason for the market turmoil seems just a pretext.
Ukraine and Argentina both look worrying, but their impact on global financial markets should be limited.
The biggest repercussions have been in the foreign-exchange markets, where even currencies of countries with relative fundamental strengths, such as the Polish zloty and the Mexican peso, have started to show signs of strain. Pressures have also emerged in asset classes that have so far remained resilient, such as U.S.-dollar-denominated emerging-market bonds. That will understandably make investors nervous.
But some of the concerns may ease. China is seeking to shift from an economy led by investment to one driven by consumption. This is such a vast and complex process that worries about how it is progressing will be with us for a long time yet. The small dip in the Flash HSBC Chinese PMI that some cite as a key reason for the market turmoil seems just a pretext.
Ukraine and Argentina both look worrying, but their impact on global financial markets should be limited.
The solution to the continuing selloff in the Turkish lira—which Friday hit a fresh record low of 2.33 to the dollar—seems clear: the Central Bank of Turkey needs to raise interest rates. But political turmoil means it is unwilling to do so; its interventions in support of the lira are inadequate in the meantime.
This could cause larger problems. Turkish companies have large foreign-debt exposures, and the lira's slide could cause balance-sheet strains.
Meanwhile, the risk aversion in developed markets smacks of using the situation to exit some very popular and profitable bets. Southern European government bonds and stocks, hybrid securities that blend features of equity and debt and subordinated bank bonds have all had a strong start to the year; but they are also volatile. No wonder investors might take the chance to step back.
Nerves are clearly running high; after so many years of economic and market turmoil, that's hardly surprising. But growth in developed economies looks likely to accelerate this year, which should yet be a vital support for markets. Investors should keep a watchful eye on emerging-markets developments, but they shouldn't rush to assume a new crisis is under way.
