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24 Aug 2015
Big implications in the EM's - Danske
FXStreet (Guatemala) - Analysts at Danske Bank explained that we have had several emerging markets (EM) crises over the past couple of years. In 2013, the combination of the Fed signalling tapering of asset purchases and China slowing down caused a sell-off in EM.
Key Quotes:
"Countries with the biggest imbalances were hit the hardest and the term ‘Fragile Five’ was coined, summarising the countries with the biggest imbalances: Brazil, South Africa, India, Turkey and Indonesia. In late 2014, a similar pattern emerged. Both times, markets calmed down after one to two months and risk appetite recovered again. This time, the Fed and China also play an important role in the EM sell-off. Chinese growth is the weakest since 2009 and the Fed has been preparing for the first hike for a while."
"However, the EM sell-off is much wider in scale now, as additional factors are creating a perfect storm for EM: the sharp fall in commodity prices is taking a big toll on commodity exporting EM in, for example Latin America, and the recent devaluation of the Chinese currency is spilling over to other Asian countries, such as South Korea and Vietnam, that have big current account surpluses."
"Finally, the overall macro backdrop in EM is weaker, as growth is at a lower level this time, with substantial economic weakness in both Russia and Brazil."
"Adding to uncertainties is the rise in US high-yield spreads in response to the fall in oil prices. Close to 20% of the US high-yield market is energy companies, which are again feeling the pain from lower oil prices. Although breakeven costs for US oil producers have come down, they are not as low as the current level of oil. Since early June, US high-yield spreads have increased by 150bp to 520bp currently, with some spillover to investment grade credit as well."
Key Quotes:
"Countries with the biggest imbalances were hit the hardest and the term ‘Fragile Five’ was coined, summarising the countries with the biggest imbalances: Brazil, South Africa, India, Turkey and Indonesia. In late 2014, a similar pattern emerged. Both times, markets calmed down after one to two months and risk appetite recovered again. This time, the Fed and China also play an important role in the EM sell-off. Chinese growth is the weakest since 2009 and the Fed has been preparing for the first hike for a while."
"However, the EM sell-off is much wider in scale now, as additional factors are creating a perfect storm for EM: the sharp fall in commodity prices is taking a big toll on commodity exporting EM in, for example Latin America, and the recent devaluation of the Chinese currency is spilling over to other Asian countries, such as South Korea and Vietnam, that have big current account surpluses."
"Finally, the overall macro backdrop in EM is weaker, as growth is at a lower level this time, with substantial economic weakness in both Russia and Brazil."
"Adding to uncertainties is the rise in US high-yield spreads in response to the fall in oil prices. Close to 20% of the US high-yield market is energy companies, which are again feeling the pain from lower oil prices. Although breakeven costs for US oil producers have come down, they are not as low as the current level of oil. Since early June, US high-yield spreads have increased by 150bp to 520bp currently, with some spillover to investment grade credit as well."