By Jeremy Gaunt, European Investment Correspondent
LONDON, Jan 29 (Reuters) - January has been the worst month for stock investors since February last year just before markets took off on a stellar risk rally.
The question is: Could this be a good thing, just skimming off a bit of froth? Or is it a precursor to something deeper and less temporary? The answer depends on whether stuttering economic recovery, sovereign debt woes and central bank plans for liquidity withdrawal become serious game-changers.
Evidence one way or the other will be on display again in the coming week with key economic data, including U.S. jobs, and central bank meetings in the euro zone, Britain, Norway, and Australia.
With world stocks heading for a monthly loss of more than 3 percent and emerging market shares dropping more than 5 percent, investors have certainly been on the back foot.
But overall these kinds of percentages hardly amount to a serious correction. So far, they are more of an adjustment, the kind of thing many professional investors see as a necessary evil that reins in exuberance.
Charlie Morris, head of absolute returns at HSBC Global
Asset Management, is among them, reckoning equities were
overbought after a rally that took world stocks
"Having a bit of fear out there is healthly," he said.
There is also evidence that, athough investors have been stepping back from stocks, they have not been panicking.
Reuters polls of leading global investors this week showed they had cut back on equities in January.
But they also eased back on their safer bond and cash holdings, most likely in favour of alternative assets such as property, commodities and hedge funds. [ID:nLDE60R1JK]
Fund tracker EPFR Global's latest weekly data, meanwhile, shows that while investor outflows from various equity groupings hit multi-week highs, a lot of it flowed into emerging market bonds, which are part of the risk trade.
"And the fact that investors pulled another $10 billion out of money market funds, bringing the year to date total to $70.1 billion, suggests that the appetite for more risk and greater returns is far from dead," EPFR said.
ON THE OTHER HAND...
All this is the argument for it being a "healthy", froth-removing excercise. But the headwinds buffeting global investors should not be underestimated.
Take the fear of the impact of central banks withdrawing liquidity. It is the liquidity pumped into the system, after all, that triggered much of the risk rally in the first place.
Investors have already reacted sharply to China's tightening, even to the extent that the implementation of previously announced moves caused a risk aversion shudder this week. [ID:nLDE60Q21F]
The coming week sees a number of policymaking meetings, including at the European Central Bank, Bank of England, Reserve Bank of Australia and Norges Bank.
Both Australia and Norway have already begun raising rates and the former could so do again, to 4 percent.
The ECB is expected to keep rates unchanged, but attention will be paid closely for any signs of support for hawkish Governing Council member Axel Weber's view that the bank could remove more of its crisis support in coming months and will not set interest rates to suit the euro zone's troubled members.
Greece, Portugal, Spain and Ireland will all remain in the spotlight with increasing talk about a European Union bailout for the former. Some believe such a move could undermine euro assets by implying a move away from demanding fiscal discipline. [ID:nLDE60S0D6]
The BoE story may be even more direct, however, with the bank expected to call a halt to its 200 billion pound ($325.4 billion) liquidity-creating programme of buying back old bonds as quick as it issues new ones.
How much the BoE has kept gilt yields down with its buying will become clear fairly soon.
AND THEN AGAIN...
When it comes to the global economy, investors can be excused if they are somewhat confused.
Data on Friday, for example, showed the U.S. economy growing at the fastest rate in six years, with businesses stepping up spending. This kind of thing drives up the dollar, hits bonds and generally weakens low-yielding assets around the world.
But December's jobs report was very disappointing for anyone wanting signs of a consumer rebound. Economists at ING note that since then initial jobless claims have all pointed to no change in January.
So investors could be bookended by a robust economic reading on one Friday and a limp one on another.
In the meantime, the coming week will see a raft of maufacturing and services data with both the U.S. and euro zone economies expected to see some improvement.
(To read Reuters Global Investing Blog click on http://blogs.reuters.com/globalinvesting; for the MacroScope Blog click on http://blogs.reuters.com/macroscope; for Hedge Hub click on http://blogs.reuters.com/hedgehub) (Editing by Susan Fenton)