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Effects of Fed Tapering on Emerging Markets

On Saud

EM bonds are being sold off with India and Indonesia leading the way, joined by Thailand close behind down 9 trading days in a row (20% decline since may, worst since 1998). Equity markets are being sold off with the Indian banking sector down 2.5% Monday, (35% from the highs), while the worsening situation is in the Philippines exchange. The IDR has collapsed by 3.9% overnight (biggest drop in 5 years), while the INR fell from its best day in 11 months to end the day 1.5% lower. Elsewhere the TRY has hit fresh lows against the EUR. With FED tapering on the horizon, moderate bids of the US Treasuries continues with more demand expected in the coming weeks, as capital floods out of emerging nations and into the security of US paper.

Effects of tapering by the FED have begun to shape, as emerging market currencies begin to decline sharply. The worst fear is that domestic borrowers in these countries may not be able to pay back their dollar-denominated loans. In part, realizing a worst case scenario wherein, defaults across the domestic banking sector resulting in banking losses, or even failures across emerging nations. The IMF has warned against a rush to exit from ultra-easy policies that have been put into place to spur growth. Speech by Christine Lagarde, IMF Managing Director, "Policies and policy coordination are not yet where they need to be. Failing to act at the global level, with each country playing its part, could put the global recovery at risk… I do not suggest a rush to the exit. UMP (unconventional monetary policy) is still needed in all places it is being used, albeit longer for some than for others. In Europe, for example, there is a good deal more mileage to be gained from UMP. In Japan too, exit is very likely some way off."

The initial statement of creating a consortium of central bankers exists in smaller central-European and east-Asian nations, but not between major and emerging nations. The fears of FED tapering have rattled emerging nations in the past week, currencies are depreciating against the USD, as per the below matrix:

Turkish CB has been attempting to control TRY weakness via regular auctions

-TRY auctions are usually around $50mio, latest policy meeting changed to $100mio

Macro rotation in financial and economic activity: Where is the opportunity?

On Ideas in the Making

US markets delivered truly outstanding, amazing results last year. On average there was no better place to be invested, optimism reached new highs and everyone is convinced a recovery is in play, even though for some reason or another people still talk about how times are tough.

Those who own stocks have seen their assets go up incredibly from the insane market bottom that was 2009. 2011 saw another pullback and now 2013 has been crazy. But the question is, can the US continue to deliver such outstanding returns on investments? or even a better question is, was the insane returns justifiable? The US economy isn't substantially better, and defintely not 30% better, and the outlook is still somewhat hazy. Although most people would agree a modicum of a recovery is happening, real wages, unemployment and the like continue to improve rather slowly.

From a technical standpoint, US markets haven't touched their 200 DMA average in around 400 days, and haven't been below it for any significant amount of time since 2011. The markets experienced a pullback last few weeks, but have quickly readjusted. the question is will this adjustment go through? how far will we go? Noone knows the answers to this question, but in my opinion, a macro rotation is at play.

What do I mean by macro-rotation? I mean I a long term money flow cycle is slowly changing, and it will effect just about every kind of money flow imaginable. Bonds, equities, commodities, emerging markets etc.

It all starts with the falling of U.S. Hegemony. Last year We saw the number one indicator of the U.S. hegemony take on a massive reversal, that is the 10 year treasury yield began to break out of long-term decline. it is uncertain if the breakout will continue, but one thing is for sure, demand for U.S. treasuries is beginning to wane. At the same time, The US dollar index has also began to wane, even though there has been an insane amount of money tied up in he U.S. dollar the past couple of years as the dust settles around the world and investors consolidate.

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