Last month’s sharp drop in US and European markets could well have the capacity to give investors pause for thought as they mull over a number of different factors that could influence the potential for future gains in the coming days and weeks. As suspected the Federal Reserve trimmed another $10bn of asset purchases starting this month, raising the prospect of further turmoil in emerging markets, and while some of these emerging markets may have the capacity to cope better than others, there is no ignoring the fact that this area of the global economy is likely to have slightly lower growth expectations over the next 12 months, than originally estimated, at the end of last year. Throw in some uncertainty about the prospects of Chinese growth and the health of its shadow banking sector, and investors will surely need to reassess valuations in certain areas where there is exposure to emerging markets. After seeing manufacturing PMI’s hit a six month low of 49.6 at the end of last week, non-services also came in weaker than expected this morning at 53.4. The recent fall in US yields, despite the Fed starting its taper program certainly seems to suggest that there is some nervousness about rising uncertainty in emerging markets, as investors become somewhat risk averse, and this could well encourage some more hawkish members of the Fed committee to speed up the tapering process as a window opens to cut stimulus further when US yields are falling back. While most of the attention has been on events in emerging markets there still remains the matter of events in Europe, and last week’s slightly weaker than expected flash CPI reading for the Eurozone once again puts the focus this week back on the ECB, and the prospect of another rate cut at its weekly meeting on Thursday. Throughout January a number of ECB members, as well as Mario Draghi himself, have insisted that there is no deflation risk in Europe, though we could get “a prolonged period of low inflation”, so to change tack this week would send completely the wrong signal and suggest that maybe the ECB were panicking, about areas of price weakness in certain parts of the euro area. In any case, today’s final manufacturing PMI numbers for Spain, Italy, Germany and France are expected to paint a positive picture for this sector in January, the weakness in France notwithstanding. Spain is expected to come in at 51.1, Italy 53.3 and Germany 56.3. France is expected to remain in contraction at 48.8. In the UK the manufacturing sector PMI for January is expected to remain unchanged from the reading in December, coming in at a fairly healthy 57.3, still one of the highest in Europe. Back in the US, concerns about a slowing labour market are set to come back into focus later this week with the January jobs report on Friday. Will last month’s disappointing December number get an upward revision, and was the weak employment component in last Fridays January Chicago PMI number a warning of something more ominous. Today’s ISM manufacturing number for January will be closely scrutinised for a slowdown in the manufacturing sector with expectations of some weakness from the December number from 57 to 56.4, while there will also be some trepidation as to how the bad weather in January has affected economic activity as well. It would be a surprise if there hadn’t been any negative effect at all, but it has been surprising in light of some of the recent data how inconsistent some of it has been. For example December retail sales showed a rise of 0.2%, yet core durable goods for the same month were sharply negative, down 1.6%, and have been negative for five of the last six months. EURUSD – last week’s break below the 1.3500 area now opens up the prospect of a move toward the 1.3300 level, with fairly strong resistance now sitting around the 1.3700 area. We also saw a bearish engulfing candle on the monthly charts suggesting the bias has now shifted towards the downside, and a subsequent retest of the 1.3000 level. Long term trend line resistance remains at 1.3865 from the all-time highs at 1.6040 and ultimately this remains the key obstacle to a move through 1.4000. GBPUSD – we may well have seen a short term top in cable last month at 1.6665 and Friday’s break below 1.6480 suggests we could well be heading for a move lower towards 1.6300. We need to get back above 1.6510 to stabilise and argue for a retest of last month’s high. EURGBP – last week’s failure at the 0.8300 level keeps the onus on support at the major support at the 0.8160/70 level which is the 61.8% retracement of the entire up move from 0.7755 to the 2013 highs at 0.8815, and a new one year low. Last week’s bullish engulfing day looks in danger of being negated after the dip below 0.8200, but just about remains intact, but we need to get above 0.8280 to prevent losses towards 0.8000. USDJPY – the US dollar continues to find bids around the 101.80 level, but last week the US dollar posted its worst month since April 2012 and bearish engulfing month. This would suggest we’ve seen the highs in the short term, and could be set for move towards 100.00 and 95.00. We need to see a move beyond 103.80 to suggest a move back towards 105.50. CMC Markets is an execution only provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.