Optimism in emerging

The decision triggered a rally in US stocks and bonds, which helped other international markets as investors concluded the central bank will keep rates unchanged for the short-term.
The perception is that economic growth is accelerating without generating faster inflation.
Another very positive event was the release of GDP figures, which increased at a faster-than-forecasted annual pace of 3.5% for the last quarter of 2006.
The economists expected only 3% gains, so everyone was surprised. The environment was propelled by declining gasoline prices that helped increase consumer spending and contain inflation.
The decision on interest rates allowed emerging markets, such as Hungary, to enjoy an unchanged yield advantage over developed markets.
The Budapest Stock Index (BUX) rose by 387 points or 1.63% for the week. In order to understand the main factor driving emerging markets such as Hungary, we must first understand the relationship between it and interest rates in the US.
Investors are hungry for risky, emerging markets stocks when the economic outlook in the US is looking "shiny", which implies the Fed would leave or decrease interest rates.
When interest rates increase in the US, international investors sell off their more risky stocks and bonds in emerging markets (causing the BUX to lower) and buy into safer assets and higher yielding US bonds.
In terms of the local financial environment, for the next few weeks investors will be paying attention to the fourth quarter earnings published by Hungarian publicly traded firms.
If they bring any surprises, which translate to unexpected earnings figures, the stock will come under buying (price goes up) or selling (price falls) pressure.
We should also focus our attention on perceived political instability, which might been seen if there are more political riots, such as those last week outside Parliament, and could negatively affect the Hungarian bourse.
Investors might show a little more caution, and volume could be low, if worried buyers and sellers leave the market or become inactive, waiting for any outcome from violent riots and other political acts.
It appears as if the United States was in a scenario of slightly better global growth, more contained inflation, and better financial stability.
However, downside risks in underlying financial conditions remain. Growth could slow more sharply in the US if the housing market were to weaken rapidly.
In addition, inflation could spike, possibly reflecting rising energy prices, especially oil.
We must stay vigilant to any disorderly unwinding of global imbalances which could become a threat, a slower economy in the US and possible political instabilities in Hungary, as well as disappointing last quarter earnings for the Hungarian companies that trade in the stock exchange.