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When a Friday combines with the last trading day of month, it is often a recipe for greater volatility in markets as benchmark allocations are re-weighted by larger investors. This can create some choppy trading conditions and the risks are a little greater after the volatility seen this week, primarily from emerging markets.  We are ending the week in a slightly better tone.

The Turkish Lira, which was initially suffering in the wake of the rate hike earlier this week, has stabilised as has emerging market FX as a whole. There were some stern words from the Indian central bank chief yesterday in terms of the developing world ignoring the impact of withdrawing stimulus on emerging markets, especially when emerging markets acted as a counter-weight to the global financial crisis. As such, it’s worth keeping an eye on how this develops as a global political issue.

For today, the main data focus will be with inflation data in Europe, with the market expecting a rise from 0.8% to 0.9%, but the actual outcome was 0.7%. The main issue is what is happening in the periphery, where we are seeing inflation nearly at zero.

Looking at a GDP weighted measure of inflation in Italy, Spain, Greece, Portugal and Ireland, this measure is currently reading 0.3% and has been below Eurozone CPI since April of last year. For all the period from 1999 to 2009, this measure was above Eurozone inflation and reflects why these economies became far less competitive. For now though, it’s noticeable that the euro is now below trendline support at 1.3546 and a break below would put the single currency on a more defensive footing of the start of February.

More:  Euro-zone negative deposit rate possible in March as deflation debate is high on the agenda