Financial Markets Shaken by Volatility as Emerging Markets Worry Investors

by on February 5, 2014 5:04 am BST

Emerging markets – from Turkey to South America to Argentina – is bringing a lot of volatility to financial markets as investors worry about a global shake up. Investors have seen this before, and a capitulation in the emerging economies looks like history may repeat itself as the Federal Reserve brings in quantitative easing and reducing liquidity that was invested in many of these emerging markets.

Nearly two decades ago, the United States was strongly emerging from a recession and, then, Federal Reserve chairman Alan Greenspan began to tighten monetary policy, and this became the big wrench in the financial gears. The Federal Reserve is not tightening monetary policy (increasing interest rates), but the reduction of the ongoing, five-year plus, quantitative easing program is causing markets to react adversely and further supports the thesis that the current equity rally is due to monetary policy and not economic growth.

The Asian markets have seen a big hit in equities as the Hang Seng has declined 11 percent, and the Nikkei has fallen 13 percent year-to-date after seeing a 60 percent gain in 2013.

Now, the Federal Reserve has committed to a zero-interest rate policy, known as ZERP, for at least another year; but, it begs to question: If the markets respond to a reduction of liquidity, what will they do when borrowing costs increase?

Janet Yellen will have her hands full as the US stock market has recorded its worst February start in over 30 years.