This Is The Best Explanation We’ve Seen Of Why Emerging Markets Are Getting Slammed
Joe Weisenthal
Markets are getting slammed today, and the pain is particularly acute in the emerging markets space.
What’s going on?
Citigroup currency specialist Steven Englander attributes the move to a sudden turn among major world central banks that policy is likely to be tighter sooner than expected.
ld have been that the MPC would find a way of backing away from any suggestion that 7.0% would open a debate on tightening. Now that is less clear.
EM currencies are feeling the pain but the driver is investor fear of a sudden lurch to hawkishness among G10 central banks. Consider the list below of G10 drivers of liquidity concerns:
1) Market worried about Fed tightening and Fed forward guidance
2) Strong UK data and BoE hawkish tilt
3) BoJ member talking about no additional easing and ultimate QE exit
4) SNB macroprudential move on housing
In a recent set of visits to Asia and Switzerland, I was struck by the extent to which investors saw a backing up of US rates, and potentially earlier-than-signaled Fed rate hike as the major risk on the horizon, far more than with respect to a China slowdown or credit crunch. The more concerned among investors saw US rates backing up and even an early policy rate hike as driven by strong US growth or alternatively a sudden realization that there was not nearly as much excess capacity as had been thought. The more moderately concerned saw markets challenging the Fed on its forward guidance, with the outcome to be data determined. There were very few who saw any sort of downside risk to rates or the US economy. Among Asia clients by far the biggest risk they saw was a pullback in global liquidity which would tighten liquidity conditions in EM. Now combine that with the ambiguity coming out of the BoE on future monetary policy and the comments that leave open the options on monetary policy as the 7.0% unemployment target is approached. Even a month ago the overwhelming view would have been that the MPC would find a way of backing away from any suggestion that 7.0% would open a debate on tightening. Now that is less clear.
Read more: http://www.businessinsider.com/steven-englander-on-emerging-market-selloff-2014-1#ixzz2rK1Lq58z
Could you tell me why the Emerging Market Currency chart was removed? Thanks.
As the EU bonds look to be (once again) a reasonable alternative to U.S. debt investors will demand a better rate from U.S. debt. This happens no matter what the Fed does, as the market sets the rate for long debt. The Fed only sets the rate for short debt. As our exploding debt shows no sign of stopping there is now a good reason for bond buyers to want a better return. THAT is driving the market down.
Big moves in the markets always seem to be central bank related.