ETX Capital Daily Market Bite, 20th August, 2013: Emerging Markets Sell-off On Fed Tapering Woes
August 20, 2013 9:25 am
August 20th, 2013, Daily Market Bite from Ishaq Siddiqi Market Strategist
Big flight out of emerging markets continued overnight as investors appear convinced the Federal Reserve will initiate tapering at next month’s policy meeting. Asian markets have benefited hugely on easy Fed cash over the years but with a reduction in liquidity due to tapering to contend with, there is growing concern that capital outflows from emerging markets will rapidly accelerate.
This has tarnished the investment case for the emerging market space as investors would rather pile into growth-focused assets geared to the US economic recovery. The US dollar wins on the dual play of growing optimism over the US economy/Fed tapering stimulus, while other currencies underperform. Bond yields have rose sharply in recent days on the back of the same dual play reasons – the US-10 year Treasury yield is at around 2.83% – just a little off its two-year highs. In response, UK and German bond yields have followed suit but core government bonds in Europe are recovering some lost ground this morning following weakness in previous sessions.
Equities and commodities in Europe register modest losses this morning on weak overnight leads together with market participants cutting exposure to risk ahead of the Federal Reserve’s meeting minutes, due Wednesday. With around two weeks or so to go before the Federal Reserve’s September policy meeting and press conference, traders are re-weighting their asset portfolios just to get ahead of the Fed. Market participants do not want to get caught out on the wrong side if tapering does indeed start in September — that’s why we are seeing many in the market tinkering their portfolios to react favourably to tapering [i.e. dumping emerging market assets in favour of developed market assets] — expect this to be the theme until the Federal Reserve’s next meeting.
So to recap the ugly session in Asia overnight—which weighs heavily on price-action in Europe this Tuesday morning—India’s Sensex index fell for the third consecutive session, down 0.3% but that comes after Friday’s and Monday’s losses worth 5%. India’s rupee sunk to fresh record lows versus the US dollar. Aside from impending Fed tapering to hurt Asian markets, India has problems. The country’s economic growth has slowed over the past year, weighing sharply on the rupee currency — this weakness triggered a response by the Reserve Bank of India which failed to convince the market. The RBI implemented policy measures to reduce pressure on the rupee, including tighter capital controls and a hike in duty on gold. But, these measures have been regarded by many in the market as an act of desperation to prop up the rupee rather than measures which will ensure longer term stability. The RBI now has the tough task of supporting the rupee by engaging in monetary tightening but that would curb economic growth at a time when the country is slowing down.
Meanwhile, Indonesia’s Jakarta Composite tanked, off 4.3% after falling 5.6% on Monday, reacting to not only Fed tapering fears but also data which showed that Indonesia’s current account deficit widened more than expected. Indonesia’s rupiah currency also suffered, losing 1.7%, leading the declines in emerging market currencies. Elsewhere, Japan’s national index ended down 2.6% at 13396, its lowest level since June 2013. Chinese markets were weaker — the Hang Seng fell 1.9% while the Shanghai Composite recovered some from earlier falls but still only posted limited gains. Looking to the rest of the session, there’s little to note on the economic diary so market participants will be fixated on the Fed meeting minutes due Wednesday. US retailers may distract us later this afternoon with Home Depot, Best Buy, JC Penney and TJX Companies [owner of TK Maxx] are all due to report quarterly earnings.
August 20th, 2013, Daily Market Bite from Ishaq Siddiqi Market Strategist
Big flight out of emerging markets continued overnight as investors appear convinced the Federal Reserve will initiate tapering at next month’s policy meeting. Asian markets have benefited hugely on easy Fed cash over the years but with a reduction in liquidity due to tapering to contend with, there is growing concern that capital outflows from emerging markets will rapidly accelerate.
This has tarnished the investment case for the emerging market space as investors would rather pile into growth-focused assets geared to the US economic recovery. The US dollar wins on the dual play of growing optimism over the US economy/Fed tapering stimulus, while other currencies underperform. Bond yields have rose sharply in recent days on the back of the same dual play reasons – the US-10 year Treasury yield is at around 2.83% – just a little off its two-year highs. In response, UK and German bond yields have followed suit but core government bonds in Europe are recovering some lost ground this morning following weakness in previous sessions.
Equities and commodities in Europe register modest losses this morning on weak overnight leads together with market participants cutting exposure to risk ahead of the Federal Reserve’s meeting minutes, due Wednesday. With around two weeks or so to go before the Federal Reserve’s September policy meeting and press conference, traders are re-weighting their asset portfolios just to get ahead of the Fed. Market participants do not want to get caught out on the wrong side if tapering does indeed start in September — that’s why we are seeing many in the market tinkering their portfolios to react favourably to tapering [i.e. dumping emerging market assets in favour of developed market assets] — expect this to be the theme until the Federal Reserve’s next meeting.
So to recap the ugly session in Asia overnight—which weighs heavily on price-action in Europe this Tuesday morning—India’s Sensex index fell for the third consecutive session, down 0.3% but that comes after Friday’s and Monday’s losses worth 5%. India’s rupee sunk to fresh record lows versus the US dollar. Aside from impending Fed tapering to hurt Asian markets, India has problems. The country’s economic growth has slowed over the past year, weighing sharply on the rupee currency — this weakness triggered a response by the Reserve Bank of India which failed to convince the market. The RBI implemented policy measures to reduce pressure on the rupee, including tighter capital controls and a hike in duty on gold. But, these measures have been regarded by many in the market as an act of desperation to prop up the rupee rather than measures which will ensure longer term stability. The RBI now has the tough task of supporting the rupee by engaging in monetary tightening but that would curb economic growth at a time when the country is slowing down.
Meanwhile, Indonesia’s Jakarta Composite tanked, off 4.3% after falling 5.6% on Monday, reacting to not only Fed tapering fears but also data which showed that Indonesia’s current account deficit widened more than expected. Indonesia’s rupiah currency also suffered, losing 1.7%, leading the declines in emerging market currencies. Elsewhere, Japan’s national index ended down 2.6% at 13396, its lowest level since June 2013. Chinese markets were weaker — the Hang Seng fell 1.9% while the Shanghai Composite recovered some from earlier falls but still only posted limited gains. Looking to the rest of the session, there’s little to note on the economic diary so market participants will be fixated on the Fed meeting minutes due Wednesday. US retailers may distract us later this afternoon with Home Depot, Best Buy, JC Penney and TJX Companies [owner of TK Maxx] are all due to report quarterly earnings.
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