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Rothschild: EM Sovereign Debt Could Be Approaching “Bubble Territory”

Investment managers at Rothschild haven’t changed their generally positive outlook, but note four primary concerns on their radar.

Rothschild: Ukraine is part of larger global issue

“Any further escalation of the ongoing tensions between Ukraine and Russia could depress investor sentiment and cause energy prices to rise,” the firm wrote in their “Market Perspective” publication. Although it is typically viewed as an isolated event, Russia’s actions in Ukraine are viewed by some in the financial community as a larger piece of a puzzle that includes Syria, Iran and a play against the US dollar.  On the positive side, the publication noted Oil prices have been stable and, unless surprise tensions surface, are “likely to continue to trade within a tight range.”  Inventories across the developed world are rising, a positive for supply side economics.  “Slowing economic growth in China and higher rates of production from the US are the two main risks to energy prices. However, any increase of tensions in Ukraine could lead to the introduction of economic sanctions on Russia, which would have implications for global energy markets over the short term.”

Rothschild: Emerging markets sovereign debt markets could be approaching “bubble territory”

Rothschild’s second concern is recovery across the developed world could stall, with concerns about deflation in Europe, and its “peripheral sovereign debt markets could be approaching bubble territory,” the letter said, but noting concerns being addressed.  “While conditions in Europe’s peripheral countries have improved, within the core France has been a concern. But it now seems to be moving in the right direction. Newly elected Prime Minister Manuel Valls has outlined spending cuts for 2015 to 2017, which include welfare benefits.”

Rothschild: Rising US rates

The third concern is that interest rates in the US could rise as inflation, wage pressures and rising rents could push the US Federal Reserve to raise rates.  Nothing the US is one of the main engines of global growth and monetary policy remains loose, “the fiscal drag is fading and the boost provided by the shale oil and gas revolution is helping the economy grow out of a number of structural problems,” the letter said, noting this has occurred as government debt and the trade deficit have been falling.  “The latest measures of the supply of money and bank loans indicate capital spending and investments are picking up. Although so far they remain below their long-term averages, the trend is positive.” The letter also noted that tapering is not tightening, meaning first the Fed’s record stimulus must be eliminated before a tightening of the reigns would occur.

Rothschild: Emerging markets vulnerable to rising US rates, China

The report noted the vulnerabilities in emerging markets, saying that in addition to rising US rates a dependency with China could lead to market instability. “The pace of global growth is dangerously reliant on China, which last year confounded expectations of a substantial slowdown. GDP figures for the first quarter also came in slightly above consensus forecasts. China’s economy is likely to weaken as the supply of credit tightens and property investment slows.”

See full report: Rothschild: EM Sovereign Debt Could Be Approaching “Bubble Territory”