Middle East markets to look at U.S., European central banksStaff writer ▼ |
The key factors in market direction in 2014 are likely to be the U.S. Federal Reserve's tapering process and the U.S. fiscal situation, and their interrelation with a recovering U.S. economy. In the last few years, the U.S. Federal Reserve has maintained an aggressive risk management approach to monetary policy in the face of disappointing growth. That continues now, with the Fed keen to differentiate the rate hike cycle from tapering and the end of quantitative easing.
Meanwhile, the weakness in the U.S. economic recovery has been due to an increasing fiscal drag, the eurozone crisis and a relatively weak housing market. Housing market turned in 2012 and the eurozone crisis abated in 2013. In 2014, the fiscal impulse should also turn.
With the Federal Reserve having announced the start of the tapering, reducing its monthly bond purchasing programme by $10 billion, the pace of the tapering now needs to be finely tuned to circumstances. A fast tapering will likely result in pockets of economic and financial weakness, while slower tapering will likely lead to bubbles.
Investors will also be looking to the ECB, and in particular whether it needs to implement negative deposit rates or introduce quantitative easing.
One of the key economic trends in 2013 has been falling inflation in the United States, emerging markets and the eurozone area. This has underpinned easy monetary policy and raised the possibility that some countries will flirt with deflation in 2014. To date, inflation has continued to be relatively anchored by stable inflation expectations.
However, with inflation continuing to trend lower and authorities beginning to step back from quantitative easing, there is a chance that inflation expectations may begin to slip which would increase the chances of a deflationary scenario sometime in 2014. ■