Stocks, bonds and currencies in the emerging markets witnessed a sharp sell-off on Tuesday fuelled by concerns over US Federal Reserve slowing in its program of acquiring bond to suppress the long-term interest rates.
Emerging markets have been gaining due to the ultra-loose global monetary policy followed by Fed to pump $12 trillion of liquidity in the financial markets globally, since the financial crisis. However, the slow growth in China and concerns that Fed may slowdown its $85 billion-a-month bond purchases has triggered a significant correction in the financial markets of emerging economies.
Emerging Markets Down
On Tuesday, South African rand and the Brazilian real hit their four-year lows versus the US dollar. Indian rupee was down to its record low. Philippines and Mexico, which are viewed as comparatively strong markets, also witnessed sharp outflows. The slide in the currencies prompted many central banks to intervene. The Japanese yen was up 2.9 percent following the mostly unchanged policies announced by BOJ yesterday.
FTSE Emerging Markets index was down 1.7 percent. Since May, the index has lost more than 10 percent. Equity market in Brazil closed 3 percent down, pulling the Brazilian shares into the feared bear region. The shares have been down more than 20 percent this year.
The sell offs have also engulfed fund managers with a focus on emerging markets. As per data from EPFR, assets managers with a focus on international bonds recorded the biggest withdrawal since mid-2007, last week.
Analyst Take On Currencies
A senior strategist at Société Générale, Benoit Anne told that the money pumped by the central bank have inflated the bubble in the emerging markets, which is now had gone in a correction phase with the change in the Fed policy. The strategist warned “This will not be a short-lived sell-off.”
A report from Société Générale analyses the affected currencies, some of them are discussed below:
The Lira, which is trading close to its lows of 2011, is expected for much higher short-term rates as CBRT intervenes to provide support to the currency. The report believes, CBRT will allow short-term rates to rise much higher.
The report expects the “front end of RUB rate curves” to “adjust lower” in the coming months backed by policy easing. Also, in the long term “RUB x-ccy curve” is expected to rise sharply provided “global markets continue to re-price the Fed policy outlook.”
Today, India announced slightly disappointing consumer price inflation (CPI) and Industrial production (IP) data. The trend has been downwards though. As per the report, fuelled by a weaker data, further, downward pressure will be felt by the Indian Rupee, and the chances that the central bank will intervene have increased considerably.