Emerging Markets Rout: Blip, Correction, or Party Like It’s 1997?

By Lambert Strether of Corrente.

Yves is traveling, so I’m manfully stepping up to the plate on a financial topic: A survey of opinion on Friday’s Emerging Markets rout. I have to say, though, that the timing is awfully weird. All the Davos Men are angsting about another 1914, and lo and behold! A crisis appears! Or possibly — we might call this the Fat Tongue Theory — some bankster phoned the home office after a night on the tiles and slurred out “Sell Shell (ADR)!” and the underqualified serf on the other end of the line heard that as “Sell! Sell!” and here we go. I mean, it had to happen some time. (ReadThe Sleepwalkers: How Europe Went to War in 1914 if don’t find either of these accounts plausible).

So, herewith the survey. (It may be the time differential — it’s Sunday evening for me — but I’m not seeing any above the fold coverage of this story in WaPo, the Times, or the WSJ. So perhaps it is not, at least, 1997. Either that or they all think it is, but don’t want to precipitate events by saying so. Who knows?) Anyhow, this seems like the the best analytical framework to me. I’ll quote, and then comment. From the FT, naturally:

Similarities with 1997 emerging markets crash only go so far FT

Mr Shearing divides emerging markets into five groups, based on perceptions of their weaknesses in a world conditioned by the tapering of monetary stimulus.

The most vulnerable category, that defined by “serial economic mismanagement”, includes Argentina, Ukraine and Venezuela. The problems of these countries are largely self-inflicted.

The second group includes those countries that Mr Shearing says have “lived beyond their means” and have economies characterised by credit booms and large current account deficits. Turkey, South Africa, Indonesia, Thailand, Chile and Peru form this group – one that is particularly susceptible to US tapering.

The third group, that wrestling with the legacy of booms, are eastern European countries such as Hungary and Romania that are vulnerable not so much to US tapering but the unwinding of monetary stimulus by the European Central Bank.

The next group are the bric countries – Brazil, India, Russia and China – all of which face domestic economic policy challenges. The final group includes those emerging markets – such as South Korea, Philippines and Mexico – that stand to benefit from a resurgence in export demand.

On the FT: The concept that all “emerging markets” are not alike should be obvious, but apparently is not. Shearing’s narrative buckets (others have picked up this story) certainly aren’t the only ones possible, but at least he doesn’t see EMs (surely a problematic, teleological category in any case) as a homogenous mass.

Global markets hit by fears of growth slowdown AP


The scaling back of the Fed’s easy-money policies [“tapering”] has hit some emerging markets hard. When the Fed was pushing U.S. rates lower, emerging markets had seen an inflow of capital from investors seeking higher returns than they could get in the United States. Now investment is flowing back to America, hammering currencies in emerging markets. …

“Talk that the U.S. Federal Reserve will announce another reduction in its monthly bond purchases next week … (is also) contributing to a loss of confidence in some emerging markets,” [Jane Foley, a currency strategist at Rabobank] said.


In some countries, concerns over the local political or financial situation have worsened the market volatility dramatically. That was most obvious in Argentina, where the peso this week suffered its sharpest fall since the country’s 2002 economic collapse. …

Turkey’s national currency, the lira, hit multiple record lows in recent weeks as investors worried about the fallout of a corruption scandal that threatens to destabilize the government. …

Beyond political problems, the countries that have seen their currencies fall most are those that rely heavily on exports of raw materials used in manufacturing. The Russian ruble was trading at 34.58 per dollar, from below 34 on Thursday. The South African rand weakened to 11.13 per dollar, from 10.98 the day before.


But China’s economy is decelerating. It grew 7.7 percent in October-December 2013 from a year earlier, down from the previous quarter’s 7.8 percent growth. Factory output, exports and investment all weakened. On Thursday, the preliminary version of HSBC’s purchasing managers’ index of Chinese manufacturing fell to 49.6, the lowest reading since July’s 47.7. Anything below 50 signals a contraction.

China’s growth is still far stronger than the United States, Japan or Europe, but is down from the double-digit rates of the previous decade.


About two-thirds of the 123 S&P 500 companies that have reported fourth-quarter earnings so far have beaten analysts’ estimates, according to S&P Capital IQ, in line with the historical average. But the forecasts for income growth have been falling and coulddecline further. …

Some companies are becoming more pessimistic, too. For the January-March quarter, seven out of every 10 that have talked about their prospects have cut projections, more than average, according to FactSet. The stocks have tanked as a result. Since United Continental lowered revenue estimates on Thursday, for instance, its stock has fallen 6 percent

On the AP: Four potential narrative buckets that sound rigorous, but I’ve underlined the emotion words that, parsed out, seem to be driving the rout; we read about complex structures of cause and effect that, in the end, seem to be driven by a breeze outside themselves. Animal spirits? Of course (and I seem to be making this qualification rather a lot these days) these narratives all assume good faith; for example, they assume the markets aren’t manipulated.

Emerging Market Currencies Warren Mosler, The Center of the Universe

[T]he proactive yen move from under 80 to over 100 vs the dollar- a 30% or so pay cut for domestic workers in terms of prices of imports- was an internationally deflationary impulse.

It’s called ‘currency wars’ with the exporters pushing hard on their govts to do whatever it takes to keep them ‘competitive’. And all, at least to me, shamelessly thinly disguised as anything but. And, in fact, it’s not ‘wrong’ to call it ‘dollar appreciation’ rather than EM currency depreciation given the deflationary bias of US (and EU) fiscal and monetary (rate cuts/QE reduce interest income for the economy) policy.

On Mosler: Classic Mosler. Focused, insightful, against the grain, backed by data.

IMF warns Fed could worsen markets rout Ambrose Evans-Pritchard, Daily Telegraph (dateline “in Davos”).

Roughly $4 trillion of foreign funds have poured into emerging markets since the financial crisis in 2008-2009, much of it “hot money” going into bonds, equities and liquid instruments that can be sold quickly [Party like it’s 1997?!]

Officials are concerned that this footloose capital could leave fast in a crisis, setting off a cascade effect.

Tidjane Thiam, Prudential chief executive, said his $800bn funding empire would stay the course in Asia and the developing world. “What we are seeing is an adjustment process that is necessary. Some of those currencies need to fall. Imports will go down, exports will go up and things will come back in balance. So that’s fine,” he said.

However, global fund managers are split over the gravity of the threat. “We think there is going to be a big crisis, with Turkey and Venezuela in the front line,” said one European insurance fund.

Venezuela imposed fresh currency controls last week and devalued controlled transactions. Meanwhile, investors in Turkey are paying attention to a warning from Recep Tayyip Erdogan, the prime minister, that the country was facing “war” within its borders as political stability fractures.

Stronger countries have largely avoided the latest rout. Mrs Lagarde said investors were watching closely to see which countries would deliver on reform and which were dragging their feet. “Markets are very cunning,” she added.

On Ambrose Evans-Pritchard: Checking the byline, I just hope Evans-Pritchard wasn’t the one phoning the home office. Great quotes, though.

Why emerging markets worry Wall Street Adam Shell, USA Today

Here are some reasons why what happens in emerging markets matters to Wall Street.

*Hot money can turn cold. … [N]w that the Fed has started to dial back its stimulus, many investors are yanking their cash out of emerging markets and bringing the cash back to more stable markets and economies, such as the U.S., hurting the developing nations in the process, explains Russ Koesterich, chief investment strategist at BlackRock.

*Currency crisis could create economic crisis. …. “The currency story is fascinating and can be a slippery slope – be cautious,” says [Matthias Kuhlmey, managing director of HighTower’s Global Investment Solutions], adding that the Asian crisis in the summer of 1997 that started with a sharp drop in the value of Thailand’s baht, turned into a broader economic crisis that engulfed Indonesian, South Korea and a handful of other countries. It also rocked financial markets.

The good news this time around is emerging markets have learned from past crises and now have bigger reserves of foreign currencies and lower account deficits, which enables them to better withstand the short-term pain caused by capital flight and a weaker currency.

*A crisis in confidence could surface. “A declining currency is the clearest sign of investors bolting for the door; it’s a vote of no confidence that usually sparks sell offs in other assets, both credit and equity,” says [Joe Quinlan, chief market strategist at U.S. Trust.]. “And because investors still view emerging market assets as homogeneous, a swooning currency or asset class in one emerging market usually prompts sell offs in other emerging markets, raising the odds of contagion.”

On USA Today, in front of every hotel room door in America: “Can,” “could,” “could.” Or not! Builds suspense, I suppose.

Stand Clear of Falling Knives Barron’s Online

Pick a horror flick, any horror flick, and it’s likely to be an apt metaphor for emerging markets right now. But our favorite might actually be a comedy, Spaceballs, in which John Hurt, reprising his role in Alien, shouts, “Oh no, not again,” as a tiny extraterrestrial pops out of his belly.

Last week began with few signs of trouble. In fact, it appeared as if emerging markets might actually be strengthening—the EEM was up 1.1% on the week through Wednesday. On Thursday, however, an indicator of Chinese manufacturing strength showed activity contracting, Argentina stopped trying to prop up its peso, and Turkey tried but failed to support its lira—and the rout was on. Noticeably missing was the fear of rising rates that hit emerging markets last year. The response to the emerging-markets selloff has been to buy bonds issued by the U.S., Germany, and Japan. As a result, the U.S. 10-year yield has dropped to 2.74% from 3.05% at the beginning of the year.

That’s a sign that what’s happening in emerging markets has more to do with local conditions than what’s going on overseas. Brazil, for one, reported Friday that its current account deficit widened to $8.7 billion, bringing its 2013 deficit to a record $81.4 billion. Turkey’s own current account deficit is dwarfed only by a corruption scandal that has already made investors wary of investing. And the fear is that the problems of a few emerging markets will tar the entire asset class, despite differences in their economies and financial situations. “This is a domestically created problem,” says Michael Shaoul, CEO of Marketfield Asset Management. “And we haven’t seen anything like this since 1998.”/p>

On Barron’s: Love the lead! Shorter: First time as tragedy, second time as farce? Reinforces buckets introduced by Shearing. Could it be that investors have to know about more than assetclassesQuelle horreur!

Contagion Spreads in Emerging Markets as Crises Grow Bloomberg

The worst selloff in emerging-market currencies in five years is beginning to reveal the extent of the fallout from the Federal Reserve’s tapering of monetary stimulus, compounded by political and financial instability.

Investors are losing confidence in some of the biggest developing nations, extending the currency-market rout triggered last year when the Fed first signaled it would scale back stimulus. While Brazil, Russia, India, China and South Africa were the engines of global growth following the financial crisis in 2008, emerging markets now pose a threat to world financial stability.

On Bloomberg: “Engines of global growth.” Does that phrase actually mean anything?

Does Unilever’s Beat Signal an Emerging-Markets Turnaround? Daily Finance

[Unilever’s] latest report is not nearly as bad as was feared.

The metric most closely watched by analysts in Unilever’s reports is generally underlying sales growth, as it tries to eliminate the effect of currency fluctuations. These came in above analyst expectations, with overall underlying sales growth up a healthy 4.3% and in emerging markets specifically up 8.7% for the full year.

Encouragingly, most of the sales increase came from higher volume, meaning the company is actually selling more products. The company saw especially strong demand for its personal-hygiene segment, with things such as hair care products seeing strong demand in Brazil especially. In order to sustain this growth, the company will be investing a larger amount of money than usual in developing its emerging markets footprint. Investors were clearly relieved by the report, sending the stock up around 3.5% in U.S. trade.

On Daily Finance: Included as a reality check from the real economy. People in Brazil are still buying [worse than useless, horrible, Westernizing] personal hygiene products. And KFC — the spices, donchya know, is huge in Thailand, where obesity is now visible. So, keep calm and carry on, for some definition of “carry on,” especially since Unilever’s reports were expected to be worse than they actually are.

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 It seem to me that if the austerians running the world insist that “EMs,” as a class, impose structural reforms, they’re going to be created a good deal more political risk. Perhaps that’s the goal. Speculators like churn, after all.

This piece is cross-posted from Naked Capitalism with permission.