Tapering is tightening after all. If you don’t believe it, talk to the emerging markets who feel like the Federal Reserve left them hanging out to dry. It seems the first steps in removing extraordinary stimulus may not be so painless after all. The global economies tried to keep a stiff upper lip but now is feeling pain as the Band-Aid starts to get ripped off. The Federal Reserve’s failure to acknowledge the emerging markets in its statement is hurting some feelings and some emerging market balance sheets. The Fed also failed to acknowledge that quantitative easing caused the emerging markets to blow bubbles and live beyond their means now have to deal with a world post hot money. Instead of dealing with the massive inflows as the United States started to deleverage, they now have to deal with the outflows unmasking the ramifications of being the Fed’s economic dumping ground. Now the question is whether or not the Fed can continue to ignore the turmoil in the emerging markets and rely on our own rebounding economy or will it come back to haunt us.
BOO! It looks like could be haunting us after a big surprise drop in the U.S. manufacturing data. The Institute for Supply Management’s (ISM) factory index decreased to 51.3 in January from 56.5 the prior month and expectations for a reading above 56 and the biggest one month drop since 2011. This raised fear of contagion and the emerging markets shook even more. We saw the pain not only in the stock market but across the commodity complex. Copper took another hit after both the United States and China posted disappointing manufacturing data and the rout was on.
While the U.S. stock market is trying to rebound this morning there is no doubt that the market has to acknowledge at the very least that the tapering isn’t tightening nonsense is just that. You can argue the extent of the impact but you can’t argue that it does not have an impact.
Oil held up better than some markets as worries about Libya sending its army to a reopen a port helped widen the Brent (NYMEX:CO.C) West Texas Intermediate (NYMEX:CLH14)spread. Also fears that China demand and other emerging market demand expectations for Brent Crude are falling. Oil could also be weighed down by expectations of another crude oil inventory build. Cold weather has been a support for the market as diesel supplies are tight against a backdrop of record demand and refining issues. Tightness in New York Harbor has kept the market from collapsing. Gas demand should moderate as snowstorms should have kept folks closer to home.
On top of that according to Dow Jones, “Morgan Stanley says that new pipelines designed to solve bottleneck problems at U.S. crude hub Cushing, Okla., will have knock-on effects for West Texas Intermediate crude. We've long argued that new pipelines out of Cushing would leave the hub structurally short of crude oil," MS says. "The resulting draws should drive WTI into backwardation and materially narrow WTI's discount vs. the Gulf Coast. The result could be steeper backwardation in the WTI crude market: a structure in which crude for delivery in the coming month is more expensive than later months, they say.”