‘Newsflow’ Indicates Downturn in Emerging Markets Will Worsen: SocGen

Societe Generale isusingan unconventional metric to judge how much pressure emerging markets are under these days. Judging by the news reports about the current economic picture of the emerging markets, the situation looks bleak for the region. SocGen’s analysis shows that the correction that has been seen in their BRIC economic news-flow indicator and has still more potential of unwinding. The principal reason causing the fall of emerging markets is the shift (or indication of shift) in U.S. fiscal policy, the outlook of which will admittedly worsen in the next month when Fed’s fateful meeting takes place. SocGen’s indicator signals an expansion of the economy at above 50%. At below 50%, it highlights signs of recession, so a greater financial crisis is expected to unfold in emerging markets.

Emerging Markets

Analysts on Societe Generale’s Newsflow Watch report are Alain Bokobza, Roland Kaloyan, Philippe Ferreira, Arthur van Slooten and Parveen Singh.

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Newsflow positive for all except Emerging Markets

SocGen points out that it is going to become even harder for emerging markets to finance debts and protect their currencies; they note that the likelihood of escalation of war in Syria has even further pressured emerging markets into a sell-off. Notably since Aug 5, VIX has dramatically risen to above 16 and is edging closer to 17. SG’s Newsflow indicator also gives a three month prediction based on the current activity. As can be seen from below charts, the indicator is trending up for all other regions except BRICs.

Developed economies newsflow indicator


Indian and Brazilian central banks step up to safeguard currencies

 Meanwhile, as emerging markets face dwindling current account balance sheets, each country is stepping up its efforts to contain the damage and safeguard their currencies. India, which is facing record drops in the rupee, stepped up efforts to cushion the currency by setting up an FX swap facility for public sector oil marketing companies, to cover USD transactions.

Stabilization of BRL vs INR


In a separate note titled, “Emerging Markets central banks in currency crisis management mode,” SocGen’s Benoît Anne, however, seems more bullish, saying that Brazil is probably the only country that has made some substantial improvements through its tightening plan; the central bank hiked rates again today, however, the future guidance is careful. SocGen notes, “The key issue is the fundamental backdrop, which remains quite challenging. There are indeed persistent worries about growth, particularly amid the recent decline in business and industrial confidence that further threaten the BRL through the current account as well as through an already fragile fiscal situation via potentially lower government revenue.”

SocGen thinks Turkey has severely fallen short of what needs to be done to support Turkish lira.