By Jeremy Gaunt, European Investment Correspondent
LONDON, Nov 19 (Reuters) - Three issues are putting investors on edge as they head into a new week -- debt in tiny Ireland, tightening in giant China and the ever-moving saga of whether U.S. policy stimulus will work.
With end-of-year book balancing also looming, it is little wonder that these uncertainties have combined to knock some of the stuffing out of what was a solid risk rally.
How they are resolved -- and Ireland, at least, may be close to denouement -- will dictate the coming week's progress on markets and, possibly, the year as a whole.
"Markets have been in a phase of taking profits after a good run," said Philip Poole, head of global strategy at HSBC Global Asset Management. "Since August, a lot of good news got into the prices ... What we are seeing subsequent to that is reflection over the residual concerns which are still there, such as China and the euro zone.
Since hitting a 26-month high on November 4, the MSCI all-country world stock index has fallen as much as 4.8 percent, although it was showing signs of recovering on Thursday and Friday.
The impact on emerging market stocks -- this year's star performer -- has been both greater and faster. The MSCI EM benchmark lost more than 5 percent between November 9 and November 17 before recovering slightly.
Previously high-performing commodities have fallen as much as 8 percent over the period, again before firming a bit.
Ireland, despite its minuscule role in the global economy, has been one of the factors behind the swing in sentiment, although how much on a global scale remains uncertain.
For example the VIX index, a gauge of future volatility expectations for U.S. stocks, remains at a relatively low level and there is minimal correlation been peripheral debt spreads and moves between the euro and dollar.
Heading into the new week, investors were widely expecting a bailout for Ireland from the European Union and International Monetary Fund but were uncertain about when it would be and what form it would take.
The issue is not about Ireland per se. Investors fear a spread of the crisis to other, larger indebted euro zone economies.
"I don't think it's big enough to derail global recovery in the same way the subprime crisis did," said State Street Global Advisors Chief Economist Christopher Probyn. "But it would create a whole different level of angst if it spreads to Spain."
HOT CHINA, COOL AMERICA
Perhaps of at least equal importance is what is happening in China, which has been signalling it will take more aggressive steps to tame its inflation, implying slower growth.
Following on from this, China raised banks' reserve requirements on Friday for the second time in two weeks.
The danger of tightening is if it over-slows the Chinese economy and with it the export-oriented economies surrounding it, putting at risk the huge flows of investment money that have gone into Asia this year.
Not incidentally, Chinese growth has also been behind a lot of developed market stock gains because of its impact on the earnings of major global companies.
Bob Parker, senior adviser to Credit Suisse's asset management arm, says if China slows too much it would hit the region first, then spill over globally and finally end up hurting developed market earnings "given that China is seen as a growth driver in corporates".
Like others, he believes China can control inflation without too much damage to growth, the so-called soft landing, but recent moves in financial markets have shown what's at risk.
The Shanghai Composite has lost around 7 percent since November 11 and MSCI's Asian stocks ex Japan index is back to where it was a month ago.
Part of the inflation pressure on China, meanwhile, comes from the U.S. Federal Reserve's decision to start buying assets in a new quantitative easing programme. Over the long run, that is expected to weaken the dollar, to which China's yuan is linked.
But the third issue for investors is that the QE decision has not yet had the market impact that might have been expected. The dollar, for example, is stronger than it was when QE was announced and U.S. Treasury yields are higher.
This may be the result of asset rebalancing after a long period of pricing in QE. If it is not, then it raises the question of what might be needed next to boost the U.S. economy.
GROWTH AHEAD?
All this is occurring against a backdrop of fairly positive economic data and no sign of the worldwide recession returning.
In its twice-yearly report on Thursday, the Paris-based Organisation for Economic Co-operation and Development forecast world growth would slow next year, but to 4.2 percent from 4.6 percent this year. It expected a return to 4.6 percent in 2012.
So assuming no collapse in Ireland, a controlled slowdown in China and some traction for the U.S. economy, investors could therefore be looking at a good climate for risk assets.
In the coming week, they will get some things to chew on from a Portuguese budget vote on Friday, flash PMI manufacturing a services data in Europe, a U.S. Treasury auction and minutes from the Federal Reserve's last meeting. (Additional reporting by Sujata Rao; Editing by Giles Elgood)