* Wall Street starts lower
* Euro at two-month low after inflation data, bonds rally
* European shares sag, commodities lower
* Chinese New Year holiday closures curb activity
* Dollar regains grip on gains on resurgent yen
By Marc Jones
LONDON, Jan 31 World shares tumbled towards
their worst month in almost two years on Friday as turbulence
engulfed emerging markets.
European and U.S. markets were unable to fight the flow with
Europe's main stock indexes suffering another torrid day and
Wall Street opening down 1 percent on course for a second
successive week of falls.
U.S. Economic sentiment data was due later after a flurry of
employment benefits and inflation figures, but it was
the resumption of intense selling of vulnerable emerging markets
that remained the focus.
The Russian rouble and the Turkish lira came under
renewed pressure in the currency markets, while
government borrowing costs jumped across the board despite local
policymakers' efforts to staunch the bleeding.
Signs also grew that the stresses were increasingly
spreading to central European countries such as Poland and
Hungary, which have fared relatively well in the first phase of
Poland delayed publication of its monthly debt supply plan
until next week due to market turbulence and an overhaul of its
pension scheme, a day after Hungary scrapped a bond sale.
"We are in a negative feedback loop of weak currencies,
higher interest rates, weak growth and capital outflows," said
David Hauner, head of EEMEA fixed income strategy and economics
at Bank of America Merrill Lynch.
"This feedback loop needs to play out and that means at the
end of the day EM assets need to become much cheaper. Only then
will people come back to buy."
Euro zone consumer price inflation dropped in January,
bucking market expectations and putting the euro in the firing
Having threatened to do so all morning, it broke to a
two-month low against the dollar of $1.3507 as U.S.
trading gathered pace, having started the week at $1.37.
Eurostat's first reading of January inflation showed it
slowed back down to 0.7 percent, the level that saw the ECB,
which meets next Thursday, catch markets off guard with a rate
cut in November. Unemployment remained at a record high.
"It's now more likely than ever that Draghi is going to have
to step in with some extraordinary measure to stave off
deflation," said Aberdeen Asset Management fixed income
investment analyst Luke Bartholomew.
"The big challenge is exactly what to do. With the store
cupboard of conventional measures largely bare, any policy
action is likely to be unprecedented."
Although it is more likely to wait until March when it has
new in-house forecasts available, the most obvious option
available to European Central Bank President Mario Draghi and
his fellow policymakers is to take rates even closer to zero,
and in the case of the deposit rate that acts as floor for money
rates, into negative territory.
But they could just as easily increase the amount of cash
sloshing around the system by no longer "sterlising" the 170
billion euros of Italian, Spanish and other bonds bought at the
peak of the euro crisis.
The prospect of more ECB easing pushed down euro money
market rates and buoyed demand for euro zone government bonds
which become more attractive the lower borrowing costs go.
For the region's shares, however, it was only pain.
Britain's FTSE 100 and France's CAC 40 were down
1.5 and 1.6 percent respectively, while Germany's DAX
was nursing falls of 2 percent as weaker than expected retail
sales and pressure on Deutsche Bank added extra gloom.
For MSCI's 45-country, all-world index it
was its biggest monthly drop in almost two years having seen
more than a trillion dollars wiped off its value this week.
The sell-off has been fed by emerging markets where
political factors in countries such as Turkey, South Africa and
Argentina have amplified worries about global economic
imbalances and the end of cheap global central bank money.
Data from Boston-based fund tracker EPFR Global showed
investors yanked $9 billion from emerging stock and bond funds
this week, with equities seeing their biggest outflow in 2-1/2
The grab for safer assets meant the dollar had the
upper hand in the currency market while on the commodities
front, spot gold edged up $1,250 an ounce, though it was
set to snap a 5-week run of weekly gains.
Brent oil and U.S. crude dipped to $106.78
and $97.43 a barrel respectively while growth-attuned metal
copper drifted toward a 4 percent monthly fall.
"The absence of the Chinese market for the next week means
that we may see some further downside on commodities, especially
if we do see the dollar gaining ground," said Tim Radford, of
Sydney-based metals adviser Rivkin. The market is closed for the
Chinese New Year holiday.