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Prospects Daily: Developing-country stocks extend losses, German business confidence strongest since mid-2011, Turkish central bank to hold interim MPC Session

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Financial Markets… Developing-country stocks extended their losses on Monday, with the benchmark indexes in China, Argentina, and South Africa slumping at least 1%. The benchmark MSCI Emerging Market Index fell 1.8% to lowest level since September 4th. The combination of a sign of slowing Chinese growth, country-specific political and financial problems, and a sharp sell-off of many of developing-country currencies have fueled risk-aversion among global investors. The MSCI gauge has dropped nearly 7% thus far this month, with developing-country equity volatility (measured by the Chicago Board Options Exchange Emerging Market EFT Volatility Index) rising by 40% last week, the steepest jump in two years.

South Africa’srand fell for a fourth day against the dollar amid growing risk aversion towards developing countries that are highly dependent on external financing. The rand fell 0.4% to 11.1309 per dollar after sliding as much as 1.5% to a five-year low earlier. The yield on the country’s benchmark government bonds rose 11 basis points (bps) to 8.67%, the highest level since January 2012. Meanwhile, Turkish lira climbed 1.1% today, following a decline of 2.3% to a record low of 2.39 against the dollar earlier, as investors speculated the country’s central bank will raise interest rates at an extraordinary meeting tomorrow.

High Income Economies…Driven by accelerating business activity and more optimistic business expectations, business sentiment within the sector, as measured by the Markit (Flash) U.S.Services PMI Business Activity Index, increased from 55.7 in December to 56.6 in January, signaling a further robust expansion of service sector output.

German business confidence, as measured by the Ifo business confidence index, improved for the third consecutive month to a 29-month high in January as the current assessment and expectations regarding business development turned stronger. The index climbed to 110.6 in January, the highest since July 2011, from 109.5 in December.

Posting a merchandise trade deficit for the 17th consecutive month, Japan had a larger-than-expected deficit of 1,302.1 billion yen in December, following November’s deficit of 1,280.0 billion yen. Exports were up 15.3% (y/y) to 6,110.5 billion yen, while imports surged 24.7 (y/y) to 7,412.6 billion yen.

Developing Economies…East Asia and the Pacific: International service outsourcing to China aggregated to US$62.3 billion in 2013, an increase of 42.2% (y/y) from 2012. Service contracts from the U.S. amounted to $11.8 billion, while contracts of $7.1 billion originated from the European Union, $5.4 billion from Hong Kong, and $5.2 billion from Japan. Information technology outsourcing garnered $31.2 billion, an increase of 36.8% (y/y), while business processes outsourcing increased 25.8% to $9.7 billion and knowledge processes outsourcing increased 60.8% to 21.5 billion.

Europe and Central Asia: Amid the lira’s plunge due to tapering concerns, Turkey's central bank will hold a special Monetary Policy Committee (MPC) meeting on Tuesday to discuss recent developments and take the necessary policy measures for price stability. The currency rebounded nearly 2% as the central bank announcement of the special meeting boosted rate hike expectations.

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