The momentum behind the western European economic recovery and the US economy are taking a heavy toll on emerging economies and currencies. The trend is most visible in the rise of the blue-chip Euro STOXX Index, which has gained 9 points this year and in the remarkable strength of US equities. Similarly, the MSCI Index of equities from emerging powerhouses Russia, India, China and Brazil has slid 13 points in 2013.
The euro continued its recent stable trend after good data from Germany boosted the currency. With a more stable euro and renewed whispers about the tapering of the US Federal Reserve’s sustained buying spree, investors have shifted their attention to the more stable currencies. With improved yields in US Treasuries, emerging economies are seeing larger than expected outflows.
Perhaps the most encouraging news from Europe is the resurgence of private sector enterprises. Data from this sector showed growth in July for the first time in the last 18 months. At the same time, private industry growth around the world dipped by 13 percent.
However, the effect of the Federal Reserve’s tapering initiative is driving the world currency markets. Projections show that currencies in Turkey, Brazil, Russia, India and South Africa will decline between 7 and 14 percent in 2013. Meanwhile, the yen has lost more ground to the euro and continues to fluctuate wildly against the dollar.
The European Central Bank has indicated the region must remain focused on unemployment and private sector job development. However, economists feel that the front-loaded austerity measures enacted two and three years ago are easing. The hope is that credit markets will ease and that private businesses will pursue growth more aggressively.
Tapering Is Coming
Markets appear to have adjusted to the reality that tapering is on the horizon. The dollar continues to gain relative strength and the benchmark ten-year Treasury is gaining favor with international investors. Speculation that tapering could begin as early as October was fueled by remarks from two separate governor’s of the Federal reserve on Tuesday. The strength of US corporations supports tapering and Chairman Bernanke would like to see the reduction plan underway when he leaves office.
At the same time, the Bank of England’s (BoE) new head, Mark Carney, has announced steps to boost British sterling and to encourage job growth, clearly a top priority. Encouraging economic data indicates that the UK has climbed out of recession and is recovering. Carney has said the BOE will leave interest rates at 0.5 percent until the unemployment rate dips to 7 percent. Experts feel that will require about 3 years.
UK manufacturing has finally ended three years of dismal reports with some encouraging data. Consumer confidence is rebounding and the strained financial system appears stable. In overnight trading, sterling reached its highest point since June 21st at $1.5493 before settling at $1.5446, a 7 percent gain.
In Japan, the Nikkei Index shed 4 percent as the yen gained strength against the dollar. The USD struck a 45-day low at 96.76 yen. The yen’s strength reflects pullbacks from riskier economies in Asia and in returns on the country’s massive investments in the US.
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