In this regular series of weekend blogs on the major events in the world of global macro, the last blog of the month will reflect on the main themes of the whole month, not just the latest week. In January, rising inflation risks in the emerging markets dominated market behaviour and worries about unrest in the Middle East, and the wider impact of higher agricultural prices, replaced the European sovereign debt crisis as the main concern for global markets. Global equities and bonds were little changed during the month, but developed markets out-performed the emerging world. Global and US activity indicators remained encouraging, but the Fed showed no signs of an imminent change in its policy stance. Next week will see the publication of the US ISM and employment data, and the markets will doubtless stay focused on events in Egypt.
This month, I learned that:
1. The emerging markets can go down as well as up. Political risk stemming from events in Egypt is the dominant concern as the month ends, but deeper economic forces are also causing concern in emerging markets. In the past two years, if not for much longer than that, it has been taken for granted that the growth rate in the emerging economies would remain robust, while the performance of the US , Europe and Japan was subject to much greater risk. All of this is still true, over the long term. But, in January, the markets decided that they had become over-confident about the immediate future in the emerging world, mainly because rising agricultural prices led to concerns not only about about political stability but also about the prospects for monetary policy in many emerging countries. 
This is likely to remain an important issue for markets throughout 2011. If monetary policy in the BRICs and other emerging economies is tightened too much, then emerging equities may have a disappointing year, relative to their developed market counterparts. If, on the other hand, there is insufficient monetary tightening in the EMs, then bubbles could develop in their equity and property markets. In January, the markets leaned towards the former view, so many of the most important equity markets in the emerging bloc, including India and China, fell sharply, even before Egypt took centre stage.
2. The troubled eurozone markets can go up as well as down. The best performing markets in January included the bond and equity markets of the debt-ridden European periphery. Hedge fund and other investors were very pessimistic about these markets at the end of last year, and were therefore caught short when the German and French finance ministers both suggested that their countries might be willing to increase the size of the EFSF support fund at the EU Heads of Government meeting on 24/25th March. It is not clear yet that this will lead to a comprehensive solution to the crisis; in fact, it probably will not. But Germany and France seem to be recognising that some degree of fiscal transfer may be needed to keep the euro intact and – while highly unpalatable – this course may be less painful than the alternative. They are probably right.
3. Sometimes, it is not all about the Fed. In the past, readers of this blog have suggested that I am too obsessed with the Fed. I plead guilty. My only defence is that the behaviour of the Fed has always been, along with the economic cycle (see below), a critical determinant of sentiment in global financial markets. But that has not been true in January, and in fact it may not be true in 2011 as a whole. The FOMC statement which appeared last week was surprising only because it strongly confirmed that the Fed is on a very stable path at present. They believe (rightly) that there is a large amount of slack remaining in the US economy. They also believe (probably rightly) that the economy is recovering only very gradually from recession, and that unemployment will remain unacceptably high for several years. And finally they believe (more dubiously) that they can safely ignore the near term inflationary impact of rising commodity prices, because core inflation remains the best indicator of longer term inflation pressures in the economy. The fact that there were no dissents to the dovish Bernanke view in the January FOMC minutes clearly indicate that the Fed is not the place to look for major shocks to global market sentiment in the immediate future. So I am going to try very hard to overcome my Fed obsession. I promise.
4. The global economic upswing remains intact. This has been confirmed by virtually all of the leading indicators, business surveys, industrial output, and GDP data published during January. The exception was the very disappointing 2010 Q4 GDP data in the UK, about which I have said more than enough (here and here). It is worth remembering that, ultimately, the long term trends in global financial markets are usually determined more by the state of the world economy than by events like the European peripheral debt crisis and even the dramatic political instability in Egypt (though, admittedly, this could have profound consequences if it spread to the rest of the Middle East). We were reminded in 2009 and 2010 of the fundamental importance of the cycle. In the developed world, output is well below trend, but is growing faster than trend. That is normally the best phase of the cycle for risk assets. In the emerging world, output growth is bumping into speed limits, and that is often a more difficult cyclical phase. Those were the fundamental forces which explain why developed markets out-performed many emerging markets in January 2011 and they may well be the dominant forces for 2011 as a whole.
