Blue Point Trading Market View – June 19, 2013
Emerging markets tanking in 2013? Recently money has been streaming out of emerging markets (EM), destabilising currencies and tanking stocks. Hot money to the emerging markets in almost in a panic run. The recent Thailand, Philippines, Indonesia and other countries stock market crash is a concentrated expression of this panic. Certain EM currencies are in free fall. The decline in emerging markets, once thought as safe assets now seems no longer safe. Looking at the thumbnail, the trend in EM money flows is clear – down. What’s happening?
First, investors have begun pulling money out of emerging economies mainly because they think that the US Federal Reserve central bank may be about to wind down its easy-money policy which has supported the economy and pushed funds into the financial system. As well, interest rates of US Bonds is getting more attractive and offers less risk. Money may get more expensive in the future and holding assets that were built on the back of easy credit could be problematic. No one wants to be left holding the bag if a stamped starts. Perhaps it has already started.
Secondly, markets are showing growing concerns about the sustainability of China’s and other emerging market’s economic model. Growth rates are falling. Chinese growth was predicted at 8% now being shaved back to 7.5%. Brazilian growth trends have been on the downslide for the past few years, from 7.5% in 2010 to 2.8% in 2011 and 1.5% last year. Russia is starting to stagnat as well with their 3-3.8% growth prospects. Then of course there is always the transparency risk. But these stories are gathering steam across much of the emerging markets. Why invest in these markets, when you can get 2 to 2.5% in the safer US?
Finally – Forex pressures. Before the flow of funds in search of higher returns from assets had “had the effect of creating bubbles”, meaning that the price of bonds issued by states had been too high and the fixed interest attached to them had been too low. The trend for some investment funding to flow out of emerging economies is affecting foreign exchange rates. The South African rand has fallen by 7.0 percent in a month and the Brazilian real by 10.0 percent. The Bank of Indonesia has had to support its currency when it fell to the lowest level for four years. The authorities in Brazil and India have also taken steps to support their local money. The Indian Rupee struck a “lifetime low” of 58.98 to $1 in recent trade.
Who cares? This EM money flow could eventually have an effect on economic activity in some countries which depend heavily on inflows of capital to finance investment and business. It also has been one of the key reasons why many US based multinationals have been doing so well. If this panic turns into a stamped, it will have an effect on US based company’s earnings and of course ultimately negatively on US equities. A story to watch.
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