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MENAFN - Qatar News Agency - 18/12/2013
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(MENAFN - Qatar News Agency) Equity markets in advance economies are poised to close 2013 with an excellent performance, up over 20%, and led by the US and Japan. The Dow Jones Industrials at about 16000 was up 19% on the year in November. Interest rates are closing the year higher, by as much as 120 bps higher in the case of the US 10-year note, up less or about 40 bps higher in the German case. Official rates short-term remain near zero in most cases and are lower in the EU following the ECB's recent cut in the overnight rate to 25 bps.

n The general expectation or consensus view going into 2014 is a widely held "more-of-same". In other words: economies are all recovering and improving with the EU in particular about to post further positive growth, after emerging from recession in 2Q2013. The economies of China and Japan are expected to do relatively well, with growth of 7-8% for China, and growth near 1-2% for Japan (all real GDP growth).

n Finally, the Iran-West temporary nuclear deal of November was the icing on the cake in 2013, as geopolitical tensions and risks were defused.

n Low and falling inflation has emerged as an important factor in 2H2013 and looking forward. Retail inflation (CPI numbers), in most countries, has surprised on the lower side. It fell under 1.0% in the case of the US and the EU, threatening to break under 3% in the case of China (late in the year), and barely holding near 1.0% for Japan. Recall that central banks are trying very hard to avoid the so-called Japanese deflation scenario, while Japan itself is trying mightily to put it behind (using Abenomics which includes aggressive monetary and fiscal stimulus). This dis-inflationary development has added pressure on central banks to either stay put for longer ("no 2013 taper" for the Fed), or cut rates further (ECB), or pursue new QE type measures (Japan).

n This appears to leave us in a Goldilocks "not-too hot, not too-cold" scenario for now. Investors are happy with steadier growth, lower risk, and a relatively stable interest rate environment. Central banks are presumably satisfied in the near term. However, beyond the near term, they may have to move out of their current status-quo comfort zones. The Fed may very soon need to start tapring (probably in 1Q2014) and will be very skittish given the September 2013 experience (and miscommunication). The ECB may have to go the other way and ease further. However with rates near zero, it may need to delve into QE or negative interest rates on bank reserves, both unconventional measures and thus difficult for the ECB.

n Emerging markets, which in some cases suffered from outflows and currency pressures around September when a Fed-taper looked imminent, appear to be in better shape to weather an expected 2014 Fed taper. The latter, again, should be very well advertised and excruciatingly gradual in its first phases. Even advanced markets appear now ready for the idea of the "taper". The trading aftermath of the "good" (pro-taper) November US employment numbers (203K new jobs, unemployment at 7.0%) saw US stocks move higher and interest rates little changed.

n The above outlook is already starting to gradually impact exports (US, China, Japan) in a way that could reinforce the growth story. In that scenario, Europe catches up further as well but lags the others which could put pressure on the euro, especially if and when the ECB moves in opposite direction to the Fed.

n Recall at this point that a Fed taper would still leave short-term official rates unchanged for a long time. The Fed is bound to emphasize that point again and again in its communications. The current pace of securities purchases, 85 billion per month, is supposed to gradually wind down to zero, over 2014 and possibly beyond. The first reduction should be 10-15 billion. Subsequent cuts will depend on upcoming data and market reaction(s).

n The GCC countries continue to post steady growth of about 5% on average in real terms (non-oil GDP), on the back of strong financial positions and government spending. Oil prices are near 100 pb, but could soften further with progress on the Iranian nuclear deal. The UAE got a further boost to its growth outlook with Dubai winning the bid to host the 2020 World Expo while it, and others in the GCC, keep getting solid support from government infrastructure spending. [Recall: the UAE and Qatar stock markets were upgraded to Emerging Market status, from Frontier by MSCI, effective summer 2014.


Qatar News Agency

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