The selloff (in the emerging market) underscores fears that the U.S. Federal Reserve’s decision to taper its bond purchases may take a heavy toll on the developing world, as U.S. interest rates begin the long climb back to normal levels. With emerging nations looking more risky by the day, higher U.S. rates will act as a magnet for global capital. (here)So, are we seeing another round of emerging market selloff due to Fed's tapering?
If there is something we learned from the Euro crisis of 2011 is that when the crisis comes around again, the reactions of the players tend to be more subdued. Yes, they would run for cover but they would quickly jump back into the market because they expect the market to come back and the authority to step in to stop the downward spiral. So if we are another "tapering" selloff, then we can expect the selloff to be well-absorbed and a recovery to kick in after a week or two. Similarly, if the selloff is part & parcel of the risk-off trades, then we can take comfort that they are self-correcting in nature and the markets will come back.
If we look at the US markets, we can see that the current rally dates back to 2009. This rally is 5 years old. The previous rally that lasted 5 years was the 2003-2007 rally. We may not be at the verge of a 2008 selloff but we are sitting on plenty of profit. More than that, the market is too one-sided. We learned that if the last bull has gotten into the market, then the bears will have their days. Thus, the sharp 318-point drop in DJIA last Friday shouldn't be a surprise.
Chart 1: DJIA's monthly chart from 1900-November 2013 (Source: Stockcharts.com)
Chart 2: DJIA's weekly chart as at Jan 24, 2014 (Source: Stockcharts.com)
Meanwhile, in Malaysia we are seeing weakness in our RM. The USD-RM is pressing against the 3.35 mark. Can this level hold up? A breakout above this level would add to the inflationary pressure that is taking a life of its own.
Chart 3: USD-RM's weekly chart as at Jan 24, 2014 (Source: Yahoo Finance)
The FBMKLCI broke below the psychological 1800 mark this morning. All is not lost. The long-term uptrend line support is 1770. However, it is hard to be bullish when global equities are in turmoil.
Chart 4; FBMKLCI's weekly chart as at Jan 24, 2014 (Source:Interachart,com)
I hope some stability will return to the equity & currency market soon. It is hard to welcome the lunar new year when the news is blanketed by negative reports.