In the worst start to a year for US equities since 2008, the benchmark S&P 500 index fell 0.7% during the week ending January 10. December's employment report showed US non-farm payrolls rising by a robust 252,000, but average hourly earnings declined, accentuating deflationary fears. The dollar continued to strengthen against the euro on concerns about a possible euro crisis over Greece and the introduction of sovereign QE by the ECB. With the US Federal Reserve preparing to raise rates, investor sentiment remains fragile.
- The tug-of-war between central bank largesse and country-specific, geopolitical and economic risks will become more intense.
- Markets will focus on renewed fears of 'Grexit' and on concerns about German opposition to an ECB sovereign QE programme.
- The relentless oil prices slide, exacerbated by the dollar's strength, will put further strain on EM assets.
- The ruble is likely to weaken further, increasing the scope for contagion to other developing economies.