Emerging Markets’ Ongoing Rout
Investors are facing a world of fear when it comes to emerging markets.
Investors fear that Turkey’s central bank may not do enough at its policy meeting next week to shore up the weakening lira. Argentina’s economic outlook has deteriorated even as its officials negotiate with the IMF for accelerated aid. Meanwhile, the Turkish lira and the Argentinian peso continue sliding deeper.
The best that can be said about the Turkish and Argentine positions is that things are getting worse but at a slower rate.
Of course, an orderly decline is better than disorderly decline but nevertheless, it is a pretty weak signal of market confidence in the myriad policy proposals that have come out of the respective governments.
I don’t think it’s an overstatement to say that emerging markets are increasingly at contagion risks among themselves that originated in Turkey and to a somewhat lesser extend in Argentina.
For now, the rout in the emerging markets remains contained to the emerging markets where things are on their way of getting worse before they get better.
There are no signs of any contagion into the developed markets, which doesn’t mean that couldn’t happen.
Never forget, if confidence fades, everything fades away with it.
Of course, all that can change and there is always a speculative element hidden somewhere under the surface, but there is practically no sign of change at the moment.
Morgan Stanley in London writes in a note to investors:
- Morgan Stanley stays short on the currencies of Brazil, Mexico, South Africa, Russia, Indonesia, India and Philippines against the dollar, euro and yen.
- September is unlikely to provide much relief to emerging markets.
- Trade tensions may remain a theme and worries about Brazil’s election campaign will probably intensify.
- Investors may also focus on the outflows of so-called real money, sanctions on Russia and South African land reform over coming months.
To me, emerging markets (EM), which includes EM-currencies, EM-bonds even when issued in U.S. dollars and EM-equities remain for the time being a no-go zone.
To me it has to get a lot worse before it gets better. When you get full contagion, everything gets thrown out, and we’re not there yet.
Finally, and in part, besides all that, it’s a fact that the markets have underpriced expectations for the Fed, and with President Trump waging trade wars on multiple fronts, the tariffs will end up hurting emerging markets more than they will hurt the U.S.
No, that’s not a pretty picture.
U.S. Trade Balance
The U.S. trade deficit increased to a five-month high in July as exports of soybeans and civilian aircraft declined and imports hit a record high, suggesting that trade could be a drag on economic growth in the third quarter, Reuters reported.
The Commerce Department said on Wednesday the trade gap jumped 9.5 percent to $50.1 billion, widening for a second straight month. Data for June was revised to show the trade deficit rising to $45.7 billion, instead of the previously reported $46.3 billion.
Tariff effects are still hard to isolate in the data but the consensus for July’s international trade balance is a sharp widening in the deficit.
July’s forecast is based on advance data for goods which showed a very sharp drop in exports together with a rise in imports; the outcome in July will mark a key early entry in third-quarter GDP.
President Trump’s policies seem to have been designed to widen the U.S. trade deficit this year. A series of sizable tax cuts to higher income people who tend to spend more on imports has resulted in the continued purchase of more imports.
This is not perhaps a terribly surprising outcome. Of course, the attempts to stop Americans buying the things they want to buy with tariffs or consumer tax increases might limit the trade deficit in time, although there is limited evidence of that happening to date.
Eurozone Final Composite PMI for August
From the Euro area we had the release of the final data of the IHS Markit Eurozone Composite PMI, which includes Eurozone services that indicates output growth remained broadly steady in August, but expectations weaken. Noteworthy is the fact that business expectations about activity levels in the year ahead dropped to the lowest for almost two years amid growing concerns about the impact of trade wars and heightened political uncertainty while growth also looks worryingly unbalanced.
Fed Speak Today
Today we’ll have St. Louis Fed President James Bullard who isn’t currently a voting member of the interest-rate setting Federal Open Market Committee, will make comments today.
Speaking on Fox news yesterday, he called for his colleagues to hold off on raising rates again but appeared to acknowledge that a move higher this month is pretty much a done deal.
Etienne “Hans” Parisis is a bank economist who has advised investors on financial markets and international investments.
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