Money and Metals

The Financial Times on the equity markets. "The sell-off in global equity markets gathered pace on Tuesday, as European bourses suffered sharp losses following overnight falls on Wall Street and declines across Asia amid fears about the effect of tighter monetary policy on global growth. In London, the FTSE 100 sank below 5,500, fallling 126.7 points or 2.2 per cent to 5,494.2. The FTSE is now 10.7 per cent below its 2006 high, reached in April, and down 4.4 per cent for the year to date."

"Mervyn King, the governor of the Bank of England warned on Monday that there are signs signs of inflationary pressures in the main industrialsed economies, echoing comments from US policymakers. King, in a speech yesterday in Edinburgh, said global rates may have been too low for too long, fanning the inflation now feeding into the U.K. economy."

"In Tokyo, the Nikkei 225 Average endured its largest one day fall for two years, plunging 4.1 per cent to 14,218.60, its lowest level since November. The Nikkei's weakness contributed to severe pressure across Asian markets amid persistent concerns about the prospects for the US economy, a vital export market for the region. The Korean market fell 2.9 per cent to 1,203.86, a seven-month low."

From Bloomberg. "'There is fear that more rate increases are to come than previously expected,' said Matthias Fankhauser, a fund manager in Zurich, which oversees the equivalent of $18 billion. 'We are seeing signs of growing inflation coupled with slowing growth. That is what the market is bracing itself for.'"

"Concern about the effects of accelerating inflation and rising interest rates on the global economy has wiped out some $1.85 trillion in market value worldwide this month. Increases in borrowing costs leave consumers with less to spend on goods such as cars, televisions and mobile phones, and reduce demand for mortgages and loans."

"Anglo American Plc and Rio Tinto Group, the world's second- and third-largest mining companies, led the decline in Europe as metals prices fell. Honda Motor Co. and Samsung Electronics Co. paced a drop by exporters in Asia. Emerging markets tumbled, especially in Russia and Eastern Europe."

"Commodity producers were the worst performers among the Stoxx 600's 18 industry groups. Anglo American fell 5.2 percent to 1842 pence. Rio Tinto slipped 3 percent to 2556 pence. Gold prices fell below $600 an ounce for the first time in almost two months. Gold for immediate delivery declined as much as $15.65 an ounce, or 2.6 percent, to $588.60 an ounce."

"The global economy faces increasing 'downside risks,' including rising oil prices, falling stock markets and trade imbalances, said Rodrigo de Rato, managing director of the International Monetary Fund."

"'There are other risks, what we could call global imbalances,' de Rato said. 'The most obvious sign of that is certainly the large current account deficit in the U.S.' The U.S. current account deficit widened to a record $224.9 billion in the fourth quarter. Americans' appetite for goods made in China and other Asian countries is stoking the deficit."

"'The IMF has been advising China to move to a more flexible exchange rate,' de Rato said. 'A flexible exchange rate would make the Chinese economy more resilient.'"

"Surprise interest rate increases in South Korea and India last week were reminders of an inconvenient truth: The era of easy money in Asia is over. In recent years, the policies of regional central banks have provided generous doses of liquidity, keeping borrowing costs low and putting a floor below stock prices. Until now, loose monetary policy worked marvelously."

"The strategy may have run its course now that inflation is accelerating. On top of pressures on wages and property values, Asia is grappling with the fallout from high oil prices. More and more, their effects are seeping into consumer prices."

"What-if scenarios abound. Amid such uncertainty, Asia's central banks must act prudently to extend the region's expansion. Even if it means slightly slower growth, the outlook will be brighter if Asia avoids the booms and busts of the past."

"It's a seemingly impossible balancing act. After all, central bank officials in India, Indonesia and the Philippines may face a public backlash if their actions reduce GDP. What they have in common is crushing poverty, which adds an element of caution that the Fed and ECB don't need to consider."

"It may be a necessary evil given how quickly inflation slams living standards at the lowest end of the economic food chain. Asia's central banks may have a busy year on their hands."