Tag Archives: Emerging Market

Emerging-Market Selloff Deepens Amid Fresh Alarms Over Contagion

  • Rand sinks as South Africa enters recession in second quarter
  • Developing-nation currencies set for lowest since May 2017

Emerging markets sold off anew Tuesday as South Africa entered a recession and Indonesia’s rupiah joined currencies from Turkey to Argentina in tumbling toward record lows, reinforcing concern that contagion risks are too big to ignore.

MSCI Inc.’s index of currencies dropped for a fifth time in six days, set for the lowest close in more than a year. The rand led global declines as data showed the economy fell into a recession last quarter. Turkey’s lira slid on worry the central bank will disappoint investors at its rate meeting next week, while the Argentine peso slumped to a record and Indonesian rupiah sank to the lowest in two decades even after the central bank intensified its fight to protect it.

https://assets.bwbx.io/images/users/iqjWHBFdfxIU/iI9vU5hzApkI/v2/775x-1.png

The dollar extended its advance to a fourth day as Donald Trump threatened to ramp up a trade dispute with China with an announcement of tariffs on as much as $200 billion in additional Chinese products as soon as Thursday. As U.S. rates rise, investor fears over idiosyncratic risks in emerging markets have climbed, including Argentina’s fiscal woes, Turkey’s twin deficits, Brazil’s contentious elections and South Africa’s land-reform bill.

Meantime, the dollar is winning by default, according to Kit Juckes, a global strategist at Societe Generale SA.

“There’s not much to make me think the dollar should be going up, but there’s plenty to make me nervous about other currencies,” Juckes said. “The dollar is very strong and lacking rate support, but other currencies are worse.”

HIGHLIGHTS:
  • The rand plunged as much as 3.4 percent after a report showed South Africa’s economy unexpectedly entered into a recession for the first time since 2009. GDP shrank an annualized 0.7 percent last quarter from the prior three months.
  • The lira sank as much as 1.3 percent and Mexico’s peso weakened as much as 1.6 percent.
  • Argentina’s peso slid to a fresh record low. 
  • Indonesia’s rupiah fell for a sixth day, sinking to a fresh two-decade low.
  • CBOE’s emerging-market volatility gauge rose to the highest in almost three weeks.
  • MSCI’s index of EM stocks dropped for a fifth day; MSCI’s currency measure slipped 0.6 percent, the most in almost a month.
  • Russia’s ruble pared losses after the central bank edged closer to raising interest rates for the first time since 2014.

READ: JPMorgan Survey Shows How Quickly Emerging Markets Can Unravel

Here’s what other analysts are saying about the latest in emerging markets:

It’s Not Enough

Tsutomu Soma, general manager for fixed-income trading at SBI Securities Co. in Tokyo:

  • “The measures announced by Argentina and Turkey are probably not enough to lead to a significant improvement in their fundamentals”
  • “Contagion risks to other emerging markets are growing especially as the Fed tightens”

‘Set to Suffer’

Michael Every, head of Asia financial markets research at Rabobank in Hong Kong:

  • “Emerging-market FX are set to suffer almost regardless of what they do, the only issue is how much”
  • The dollar will remain on the front foot against emerging markets as long as the U.S. continues to raise rates and boost fiscal spending while keeping the trade war fears on the radar

‘Further Pain’

Lukman Otunuga, research analyst at FXTM:

  • “Emerging market currencies could be destined for further pain if the turmoil in Turkey and Argentina intensifies”
  • “The combination of global trade tensions, a stabilizing U.S. dollar and prospects of higher U.S. interest rates may ensure EM currencies remain depressed in the short to medium term”

‘A Penny Short’

Stephen Innes, head of Asia Pacific trading at Oanda Corp. in Singapore:

  • Argentina’s measures are “likely a day late and a penny short”
  • “These moves are a step in the right direction, but they’re unlikely to be convincing enough to remove currency speculators from the driver’s seat. I guess it’s all down the IMF’s ‘White Knight’ to the rescue. However, we are getting into the realm of unquantifiability which makes the market utterly untradable”

Most Vulnerable

Masakatsu Fukaya, an emerging-market currency trader at Mizuho Bank Ltd.:

  • Contagion risks from Argentina and Turkey are growing for other emerging markets and economies with weak fundamentals such as those with current-account deficits and high inflation rates
  • Currencies of countries such as Indonesia, India, Brazil and South Africa have been among most vulnerable
  • The Fed’s rate increases and trade frictions means the underlying pressure on emerging currencies is for a further downward move

— With assistance by Tomoko Yamazaki, Yumi Teso, Lilian Karunungan, and Ben Bartenstein

Source: Bloomberg

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More Emerging Market Chaos – How Long Before It Spreads To The Developed World?

Emerging market chaos is now front page news.

https://i0.wp.com/www.dollarcollapse.com/wp-content/uploads/2018/08/Argentine-peso-Aug-18.jpg?w=600&ssl=1

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Emerging Markets Continue to Slide as Dollar Pressures $3.7 Trillion Debt Wall

Emerging Markets Continue to Slide as Dollar Pressures $3.7 Trillion Debt Wall

Emerging market stocks extended their declines Friday as investors continue to pull cash from some of the world’s biggest developing economies amid concerns that the greenback’s recent rally will pressure the cost of servicing some of the $3.7 trillion in debt taken on in the ten years since the global financial crisis.

Argentina has been at the forefront of the recent emerging market pullback this week, with the peso suffering its biggest single-day slump in three years — including a fifth of its value yesterday — before the central bank stepped in with a move to lift interest rates to an eye-watering 60% amid concerns that President Mauricio Macri’s efforts to cut spending and stave off a looming recession in South America’s third largest economy will ignite social unrest that could toppled his government.

“We have agreed with the International Monetary Fund to advance all the necessary funds to guarantee compliance with the financial program next year,” Macri said Wednesday in reference to a $50 billion support plan in the works. “This decision aims to eliminate any uncertainty. Over the last week we have seen new expressions of lack of confidence in the markets, specifically over our financing capacity in 2019.”

Those moves shadow a similar concern for the Turkish Lira, which resumed its slide against the dollar Thursday following a warning from Moody’s Investors Service earlier this week as the ratings agency downgraded its outlook on 20 domestic banks owning to the country’s slowing growth and their exposure to dollar-denominated debts.

The Turkish lira recovered from yesterday’s decline, but was still marked at 6.57 against the dollar, near to the weakest since the peak of its currency crisis in early August. Larger emerging market economy currencies were on the ropes Thursday, with the Indian rupee hitting a lifetime low of 70.68 against the dollar this week and falling 3.6% this month, the biggest decline since August 2015, while the Russian ruble bounced back from a two-year low to trade at 68.06.

The sell-off has also affected emerging market stocks, which continue to lag their advanced counterparts, with most major EM benchmarks either in or near so-called ‘bear market’ territory, which defines a market that has fallen 20% from its recent peak.

The benchmark MSCI International Emerging Markets index, for example, is down 0.4% today and more than 3% this month alone, extending its decline from the high it reached on January 29 to nearly 17%, while Reuters data notes that 20 out of 23 emerging market benchmarks are trading below their 200-day moving average, a technical condition that investors use as a signal for further selling.

Each of the three major emerging market ETFs, which collectively hold around $143 billion in assets — Vanguard’s FTSE EM (VWOGet Report) , and iShares’ Core MSCI EM (IEMGGet Report) and MSCI EM (EEMGet Report)  — have seen net asset values fall by an average of 15.3% since their January 26 peak.

The Bank for International Settlements, often described as the ‘central bank for central bank’s, estimates that emerging market countries are sitting on $3.7 trillion in dollar-denominated debt, all of which must be serviced in increasingly expensive greenbacks.

And while the dollar index is sitting at a four-week low of 94.60, it has risen more than 5% since the start of the second quarter and is expected to add further gains as the Federal Reserve signals future rate hikes amid a surging domestic economy, which grew 4.2% last quarter and is on pace for a similar advance in the three months ending in September, according to the Atlanta Fed’s GDPNow estimate.

“We look for the dollar to stay bid particularly against the emerging market FX segment where a meaningful decline in risky currencies is spilling over into the wider risk sentiment,” said ING’s Petr Krpata. “

Debt service costs aren’t the only concern, however, as many emerging market economies rely on the export of basic resources, such as oil and gas and other commodities, to fuel their growth.

With China’s economy showing persistent signs of a second half slowdown amid its ongoing trade dispute with the United States, many of those countries are seeing slowing demand, which is pressuring dollar-denominated revenues at exactly the time their needed to both support the value of their currencies in foreign exchange markets and make timely payments on the estimated $700 billion worth of debt that is set to mature over the next two years.

Source: by Martin Baddarcax | TheStreet.com

Which Emerging Markets Will Run Out Of Money First?

For years, in fact for the duration of the US dollar’s use as a global carry currency, Emerging Markets – especially those with a currency peg – were a welcome destination for yield starved US investors who found an easy source of yield differential pick up. All that came to a crashing halt first after the Chinese devaluation in 2015 which sent the dollar surging and slammed the EM sector, and then again in recent months when renewed strong dollar-inspired turmoil gripped the emerging markets, first due to idiosyncratic factors – such as those in Turkey and Argentina…

https://www.zerohedge.com/sites/default/files/inline-images/turkey%20argentina.jpg

… and gradually across the entire world, as contagion spread.

And while many pundits have stated that there is no reason to be concerned, and that the EM spillover will not reach developed markets, Morgan Stanley points out that the real pain may lie ahead.

As the following chart from the bank’s global head of EM Fixed Income strategy, James Lord, shows, whereas returns have slumped across EM rates, outflows from the EM space have a ways to go before they catch down to the disappointing recent returns.

https://www.zerohedge.com/sites/default/files/inline-images/EM%20returns.jpg?itok=9AdbY0_8

One can make two observations here: the first is that despite the equity rout, EM stocks (as captured by the EEM ETF) have a long way to go to catch down to EM bonds as shown by the Templeton EM Bond Fund (TEMEMFI on BBG).

https://www.zerohedge.com/sites/default/files/inline-images/EM%20equity%20vs%20bonds.jpg?itok=6ljNGxw5

The second, more salient point is that a key reason for the solid growth across emerging markets in recent years, has been the constant inflow of foreign capital, resulting in a significant external funding requirement for continued growth, especially for Turkey as discussed previously.

But what happens if this outside capital inflow stops, or worse, reverses? This is where things get dicey. To answer that question, Morgan Stanley has created its own calculation of Emerging Market external funding needs, and defined it as an “external coverage ratio.” It is calculated be dividing a country’s reserves by its 12 month external funding needs, which in turn are the sum of the i) current account, ii) short-term external debt and iii) the next 12 months amortizations from long-term external debt.

More importantly, what this ratio shows is how long a given emerging market has before it runs out of cash. And, as the chart below shows, if we were investors in Turkey, Ukraine, Argentina, or any of the other nations on the left side of the chart – and certainly those with less than a year of reserves to fund its external funding needs – we would be worried.

So to answer the question posed by the title, which Emerging Markets will run out of funding first, start on the left and proceed to the right.

https://www.zerohedge.com/sites/default/files/inline-images/EM%20external%20funding%20need.jpg?itok=HxscRuEo

Source: ZeroHedge