By Jan Dehn, Ashmore Group
As the Fed prepares to hike rates in 2015, the window of opportunity presented by hyper-easy monetary policies for developed economies to undertake deeper fundamental reforms is rapidly closing.
So far, hardly any progress has been made. President Obama’s tenure has not seen the country’s economic problems solved. US trend growth has halved since the 1960s, while the debt stock has doubled to more than 350 per cent of GDP (not counting the further 300 per cent of GDP in unfunded social care liabilities). Europe and Japan recently re-engaged in QE-type stimuli to defend their fundamentally challenged economies from the effects of higher US rates in the future. Read more
By Sergio Trigo Paz and Gerardo Rodriguez, BlackRock
Periodic phases of market volatility this year have brought back painful memories of emerging markets (EM) crises. Some of these crises – particularly those associated with US monetary policy tightening in 1994 and 1999 – caused significant damage to emerging economies and their asset prices.
But those difficulties brought a hidden blessing. The crises taught countries that their misfortunes were caused not so much by the actions of the US Federal Reserve as by the lack of policy buffers and financial flexibility in their home markets. This realisation has helped foster an improvement in the overall framework of EM macroeconomic policies. Read more
“If you see ten troubles coming down the road, you can be sure that nine will run into the ditch before they reach you.”
For about two weeks in late October, it seemed as if these optimistic words from Calvin Coolidge, the former US president, might have encapsulated the mindset of emerging market (EM) investors.
But the late October rally in EM financial assets has now stalled. Investors are relinquishing hopes that market troubles may turn out to be mere phantoms and focusing again on the very real problems coming their way. Four of the most intractable are set out below. Read more
And so the fall in emerging market currencies continues. Over the past month, the third episode of taper tantrum has pushed exchange rates down almost across the board against the dollar, bringing with it the now familiar round of hand-wringing about the vulnerability of emerging economies.
Once again, however, at least as far as currencies are concerned, the latest bout of weakness falls somewhat short of full taper tantrum catastrophe. The depreciation of emerging market exchange rates looks a lot like a subset of the sharp appreciation of the dollar, which has also shot higher against the yen and the euro, than it does a weakness of the entire asset class. Read more
As beyondbrics noted early this month, the recent “dollar surge” and rising US interest rates are already having an impact on EM currencies. Two weeks later and the effects are becoming more pronounced, as the charts below show.
First, US interest rates. This is the yield on 10-year US Treasury bonds this year.
Source: S&P Capital IQ
If the recent recovery in emerging markets has calmed your nerves somewhat, then steel yourself: EM crises are here to stay. That’s according to Joseph Capurso, currency strategist at Commonwealth Bank of Australia.
The good news? EM crises don’t always mean a regional or global recession. In fact, they are rather common, and their impact can be limited. So here are the five facts you need to remember in the next EM crisis (which should be rather soon, in fact). Read more
Raghuram Rajan, governor of the Reserve Bank of India, accuses policy makers in the developed world of lacking co-ordination. But how do EM central bankers stack up and how will their behaviour shape investment decisions?
“You have to be selective this year,” says Michael Ganske, head of emerging markets at Rogge Global Partners, a fixed income fund with $59bn under management – and the selection process begins with an assessment of a country’s economic fundamentals and the credibility of its financial policy makers.
With that in mind, here is a beyondbrics rundown of the guiders, the reactors and the mavericks at key EM central banks currently battling turmoil on financial markets. Read more
Forint hits 2-year low to the dollar
That’s the forint over the last three years to the euro. On Friday, it came under renewed pressure as seveal other emerging market currencies stabilised after a week of turmoil. Read more
Currency markets like rate rises. But half-hearted central bankers, or those without political support, can easily be overwhelmed by currency traders. James Mackintosh, investment editor, explains why India has succeeded where Turkey and South Africa have failed.
After the Argentine peso depreciated sharply at the end of last week, talk has begun of a wider EM rout. Once engines of growth for the global economy, emerging markets are now seen as vulnerable with signs of weakness emerging in the Chinese economy and the US Federal Reserve reeling in its asset purchase programme, adding to domestic woes.
While the spotlight was on Argentina on Friday, how unstable are markets in India? Read more
What a difference a mountain range makes. To the east of the Andes, Argentina is in the throes of an old fashioned, disorderly devaluation, in which authorities scramble to plug every leaking channel of hard currency flows until at last they are carried off in the flood. To the west, Chile’s authorities are looking on with calm equanimity as their currency gently subsides to its own level.
What is it, other than snow-capped peaks, that unites and separates their two worlds? Read more
Ah, the heady days of the rand at 10 to the dollar. Back only in June last year, that was the big psychological market barrier. Now 11 rand per dollar is the norm. Only a few weeks ago analysts had doubts that it would get that far – in November, Barclays suggested the rand could even strengthen back to 10.
Rip all that up. With the Argentine peso, Turkish lira and Russian rouble all posting big falls in recent days, the rand is just one of several emerging market currencies under pressure. So what are the implications of the rand at 11? Read more
Did the Argentine peso’s 10 per cent tumble on Thursday bring it closer to the country’s black market exchange rate? Surely a devaluation of that magnitude would help nudge the official peso rate closer to the black market reality?
Perhaps not. As the following charts show, the official rate is still well off the black market rate – known as the “blue dollar” rate, suggesting further pressure on the official peso to depreciate. Read more
Previously, beyondbrics looked at stock exchange winners and losers of 2013. Now it’s the turn of the EM currencies.
Which currencies felt the full force of the 2013 sell-off, and which survived unscathed? Read more