Emerging markets are heading for their worst week in over four months, as rising optimism over US economic growth has re-sparked speculation on when the US Federal Reserve will raise interest rates, FastFT reports.
The developing world has been a big beneficiary from the Fed’s zero interest rate policy and accompanying quantitative easing programme. QE is now nearly over and some economists expect the US central bank to start thinking about rate hikes in the coming months, if economic growth remains buoyant.
The case for rate increases could be strengthened if the crucial US non-farm payrolls come in stronger than expected later today.
Higher US interest rates have often led to squalls in emerging markets, and the prospect is leading to some nervousness among EM investors this week.
The FTSE Emerging index fell 0.5 per cent today - a sixth consecutive day of declines that took its weekly drop to 2.2 per cent. That is the worst performance for the gauge since mid-March and the fifth-worst week over the past 12 months.
The nerves are apparent in currency and bond markets as well. Only the heavily managed renminbi has managed to hold its ground against a resurgent US dollar this week, and EM “hard currency” and local bonds are also coming under pressure.
Indonesia’s benchmark dollar bond jumped 12.5 basis points to 4.33 per cent, Turkey’s local 10-year bond yield rose another 10 bp to 8.96 per cent, and South Africa’s 2026 local bond yield climbed for a seventh day in a row.
Benoit Anne at SocGen said in a note yesterday that he remained relatively relaxed about the correction, arguing that it was exacerbated by the trickiness of trading the slow summer markets.
“This seems to look like a return of risk aversion, but I don’t think that it is as bad as it seems. For a start, liquidity is quite poor at present given that August is upon us, and I would argue that some of this price action has been amplified by the challenging liquidity conditions.
“Second, we had not seen a tangible correction for a while, and I guess a market reset was overdue. I don’t buy the argument that the Fed’s marginal tweaks are a true game changer.”
