Sell Off or Panic?

After the global market's overall downtrend last week, MoneyShow's Jim Jubak questions whether the response will be a sell off or a panic, and warns of several ramifications for you to watch out for.

What's ahead, sell off or panic?

After Friday's action, I think we can take "buy on the dip" off the list of alternatives.

Everything was down Friday—with the surprising exception of the Shanghai Composite index (IND:SHCOMP), which closed up 0.6% overnight.

At the close, the Standard & Poor's 500 index (SPX) was down 2.09% and the Dow Jones Industrial Average (INDU) was off 1.94%. Mexico was 1.33% lower and Brazilian stocks were down 1.1% in Sao Paulo. In Europe, the German DAX (DAX) had tumbled 2.48% by the close of that market; in Milan, Italian stocks were down 2.30%; and in Spain, the IBEX 35 index (IBEX) was lower by 3.64%.

In Asia, Hong Kong's Hang Seng (HSI) closed down 1.35% and Japan's Nikkei 225 (NKY) was off by 1.94%.

Among other emerging markets, Turkey's BIST 30 index (IND:XU030) was lower by 1.74% and South Africa had dropped by 1.36%.

What's going on?

I think we're seeing a renewal of the emerging market currency sell off that we saw repeatedly in 2013, on rumors—and then on the actual decision—that the US Federal Reserve would begin to taper off its $85 billion a month in purchases of US Treasuries and mortgage-backed securities. That taper, it was widely concluded, would strengthen the dollar and increase the attractiveness of dollar-denominated assets as US interest rates rose. That hit hard at emerging market currencies, especially those of countries such as Brazil, Turkey, and India that rely on overseas cash inflows to balance persistent current account deficits.

Add in recent data that argues that China's economic growth is slowing from 7.8% in the third quarter and 7.7% in the fourth quarter, to something below 7% by the end of 2014, according to pessimistic forecasts. Slower growth in China means slower growth for economies—such as Brazil and Australia—that depend on exports to China. Slower growth in those economies will turn into slower growth for the global economy as a whole, it is feared.

And finally, in the last few days, we've ratcheted up both those currency and China growth fears on news that 1) Argentina would allow the peso to plunge without central bank intervention, 2) Turkey's central bank had intervened in the markets but had not been able to stem the fall of the Turkish lira, 3) Brazil's government budget was deteriorating so quickly that the country might face a credit rating downgrade this year, and 4) at least some of the trust investments in China's shadow banking system looked unlikely to recoup the money they had lent to companies and local governments.

I take all these fears seriously and the fundamentals, in some cases, look rather dire.

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