By Paul Hodges of International eChem
Two months ago, very few people believed that markets were about to tumble. But on 18 August we published our Great Unwinding analysis. Since then, its forecasts have begun to come true, as the impact of policymaker stimulus begins to unwind.
Oil and commodity prices are falling sharply as supply/demand once again becomes the key driver for prices; the US dollar is strengthening and liquidity is tightening across the world; equity markets risk sharp falls, as investors realise they have overpaid for future growth and rush for the exits; China’s economy is slowing fast as the new leadership implements the World Bank’s ‘China 2030’ plan; interest rates are becoming volatile as some investors seek a ‘safe haven’, while others worry that stimulus policy debt may never be repaid. Read more
Riding off into the sunset, taking EMs with them…
The US Federal Reserve may have underestimated the speed of falling unemployment in the US. This could be bad news for emerging market assets.
Fund managers like to refer to the Fed as ‘the world’s central banker’. Certainly, the drama over quantitative easing has sent two sets of shockwaves through emerging markets – one triggered last May by the mere mention of tapering; and the latest this January following the Fed’s December move to slow it’s rate of asset purchases. But all the Fed really cares about is the US economy, which is why every piece of new US data is pored over as carefully by emerging market bond and equity managers as their colleagues following US and European equities.
So they would be worried to read the latest research from Keith Wade, Schroders’ chief economist. Read more
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
How well protected is Brazil against external shocks? Perhaps not as well as is commonly thought.
It has been a proud boast of Brasília for several years that it is a net creditor to the world because it holds more in foreign exchange reserves than it owes in overseas debt. However, it is far from clear that this is still the case. The issue is just one example of the vulnerabilities investors must include in their calculations of how Brazil and other emerging markets will fare as monetary policy in the developed world becomes less accommodating. Read more
The 4th in our series of guest posts on the outlook for 2014 is by Jan Dehn of Ashmore Group Head of Research, Ashmore Group
The outlook for Emerging Markets (EM) going into 2014 is dramatically better than at the start of 2013. Better fundamentals, stronger technicals and attractive valuations after a sharp technical sell-off in 2013 will lure investors. Tapering also poses less risk now, while many EM countries are now taking reforms very seriously. The way to approach this opportunity is through active management, because credit stories and elections feature prominently in the 2014 outlook. Read more
When the US Federal Reserve first suggested that it would taper its bond buying programme, aka quantitative easing, aka QE, back in May 2013, emerging markets went into a spin. The same happened in September. Now that Ben Bernanke, outgoing Fed chairman, has said that tapering is actually here, markets have, in general, taken it calmly.
Why the difference? Here are five possible reasons. Read more
For those of you who – like Lewis Carroll’s Alice – have a liking for pictures, McKinsey’s study on the effects of QE is worth a read.
It categorises in great detail the true consequences of Ben Bernanke’s decision to buy trillions of dollars in government debt and other securities, and the result of reining this programme in. Read more
Florian von Hartig of Standard Bank
With nearly two months of the issuance calendar remaining until year end, African sovereign issuers have raised nearly double the amount of funding ($6.35bn) in the eurobond market compared to 2012.
While still representing a sliver of the total EM sovereign issuance in cross-border capital markets, African sovereigns – both seasoned and first-time issuers – are offering international fixed income investors a compelling investment case when confronted with insipid recovery and low rates offered from developed markets, lingering peripheral eurozone debt woes, and overall weariness towards undifferentiated traditional EM sovereign plays. Read more
Too many Americans still can’t find a job and worry how they’ll pay their bills and provide for their families. The Federal Reserve can help if it does its job effectively.
So said Janet Yellen on Wednesday in her first comments following her official nomination by President Barack Obama to be the next US Federal Reserve chair.
The comments – which suggest Yellen is unlikely to put an early end to the Fed’s $85bn-a-month stimulus programme given the shaky-state of the US economy – should be seen as a strong short-term positive for emerging markets. Read more
Talk of an end to US monetary stimulus has caused turmoil in emerging economies, and now there are fears a US shutdown could affect global interest rates. Glenn Maguire, chief Asia-Pacific economist at ANZ Bank, joins the FT’s Lindsay Whipp to discuss the options for emerging markets.
It’s the question dogging central bankers across the emerging markets. When will the sell-off of EM assets take off, and who will be most badly hit?
While they wait, the Institute of International Finance (IIF) has produced two graphs that suggest which countries are most exposed to capital flight. Read more
Cast your mind back, if you can, to Black Wednesday in 1992, when the UK lost billions trying to prop up the pound before being forced to withdraw from the banded exchange rate system known as the ERM.
It seems the lesson of (not) using reserves to prop up your currency in a crisis has been heeded by EM policy makers. The EM currency carnage of August may have been a big shock but it didn’t spark panic spending of forex reserves by central banks. When it comes to exchange rates, after all the talk of currency wars, there seems to be a new mantra of “what will be, will be”. Read more
Central Europe was spared the worst of the downturn that hit emerging markets from May this year, but that means that the global rebound seen on Thursday following the US Fed’s taper surprise has been less pronounced in Poland, the Czech Republic and Hungary. Read more
What do you do when you take out a massive loan for 100 years – as Mexico did three years ago, taking advantage of the Fed’s easy money policy… and then find the Fed backtracks on an expected end to quantitative easing?
Why, sit pretty and look smart. Well wouldn’t you, if, like Mexico, you had borrowed $2.7bn in the world’s longest-dated government debt, presciently locking in annual interest rates of 5.75 per cent? (Mexico reopened the bond in 2011, tapping another $1bn on top of the initial $1bn). Read more
The Fed’s announcement that tapering can wait has given emerging market currencies and equities a big boost.
Here are a few key charts, which will update during the day. Read more
If emerging market policy makers were quaking at the prospect of QE tapering, they must be jubilant at its decision to go on buying bonds at the same pace – even more so, after Fed chairman Ben Bernanke revealed in a post-announcement press conference that he was watching emerging markets “very carefully”.
If that sounds like he is taking a paternal interest in their welfare, on present evidence it is a style of parenting more likely to produce prodigal egotists than responsible adults. Read more
The Federal Reserve decision to continue with Quantitative Easing is a relief for emerging markets in general and Asian markets in particular. Frederic Neumann, HSBC’s co-head of Asian Economic Research, tells the FT’s Josh Noble that when it ends the worst affected markets may be hit hard but further support may be on offer from Japan’s monetary stimulus and an economic rebound in China.
Thank you, Mr Bernanke
The most difficult job in central banking just got a little bit easier. But not much. This week Raghuram Rajan, the new broom at the RBI, must decide what to do with Indian rates.
With the Fed holding fire on the much-anticipated “tapering” of its asset purchase, Rajan and some some of his regional counterparts are likely to face calls to roll back some of the policies brought in to stem currency routs. But the message from economists – and not just for Rajan – is clear: stay the course. Read more
What a day. Emerging markets currencies, stocks and bonds got a much needed respite on Wednesday after the US Federal Reserve surprised the market by deciding to keep its $85bn-a-month bond-buying programme unchanged.
EM currencies – which suffered their worst rout in two years during this summer’s sell-off – were the biggest gainers. The Brazilian real jumped 3.2 per cent to 2.186 to the dollar, its strongest level since late June, while the Mexican peso rose 2 per cent to 12.642 to the dollar, a one -month high.
In Europe, the Turkish lira rallied 2.6 per cent against the dollar, while the South African rand gained 2.25 per cent to change hands at 9.5811 a dollar.
The Indian rupee and the Indonesian rupiah maintained their overnight losses as spot trading in these markets is not open during US trading hours. But expect a big bounce when markets in Asia open on Thursday. Read more