What looks likely to drive the financial markets once Santa is back at the North Pole and his rally has passed into the record books?
Here’s what I think deserves watching as we turn the corner into January.
- Yields on the 10-year Treasury are pushing 3%. In fact yields pushed briefly to 3.01% today—the highest level since July 2011. Nothing magical about 3% versus, say, 2.96% but 3% clearly has the market’s attention and this level is a benchmark that investors and traders are watching to gage the reaction to the December 18 Federal Reserve decision to begin tapering its $85 billion in monthly purchases of Treasuries and mortgage-backed securities. 3% isn’t enough to stall a rally, but it is likely to make the cautious more cautious.
- The Japanese yen closed at 105.14 to the dollar today and it looks like the next test will come when the currency falls to 107 to the dollar. A falling yen and even modestly climbing U.S. Treasury yields are a recipe for a stronger U.S. dollar. A weak yen might push stocks higher in Tokyo—but recent data showing weaker than expected Japanese exports have generated enough worry to restrain stock prices in Tokyo. As long as the pace at which the dollar strengthens and U.S. yields climb is slow, a strong dollar/higher yields combo is likely to make U.S. financial assets more attractive. The danger, of course, is that too fast a clip will produce fears that U.S. growth might slow and/or inflation increase.
- China looks like it will turn in 7.6% GDP growth for all of 2013. That’s above the 7.5% official target but below the 7.8% rate for the third quarter. The big question—well, the big question besides “How much can we trust this number?—is how comfortable global financial markets are with a 7.6% China. A 7.6% growth rate for 2013 would mark a third consecutive drop in annual growth and, following the laws of statistical momentum, you can expect at least some economists to start projecting another decline in growth rate in 7.4%. Add in the volatility engendered by efforts to restrain growth in the money supply and to rein in the shadow banking system (and to control China’s bad debt problem) and China looks like a major source of global financial market volatility for 2014.
- You probably don’t have a whole lot of money in the Istanbul stock market but political turmoil in Turkey, which threatens to either bring down Turkish prime minister Recep Tayyip Erdogan or to force him into a move to suppress the opposition, is potentially enough to re-enforce current skepticism about emerging markets. The Borsa Istanbul National 100 Index fell 1.04% today. Given that not so long ago the Turkish stock market was a big emerging market success story, and the retreat in Istanbul is one more reason for investors and traders to say, “Who needs emerging markets and all that risk now?”
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