The Move to Safe Havens May Have Begun

While the emerging markets are getting a bit of a reprieve today, it bears noting that the move to so-called safe haven assets and currencies has begun. This suggests to me that George Magnus’ warning about this emerging markets crisis must be heeded. I believe a key component to the selloff’s ending will be better economic data out of China as the interest rate hikes taken in several EM countries have not had a beneficial effect. Bonds will continue to rally until the EM crisis has been decisively dealt with. More thoughts below.

Is it a crisis?

I am still on the fence regarding the severity of the emerging markets crisis. My general view is that the economic outlook in the new G3, the US, Europe and China, is positive enough to overcome ill effects from the emerging markets. But theview by George Magnus that a crisis is brewing has put me on alert. Moreover, all three G3 economies have weaknesses that have left us vulnerable to a negative feedback effect in equities markets. In the US, peak growth is behind us in my view, growth has been bolstered by inventory builds as domestic final sales support 2% growth, not 3% growth and markets are already overvalued. In Europe, the recovery is only in its infancy. And in China, an epic creditbubble has to be contended with while the Chinese economy rebalances away from export- and investment-led growth.

This piece is cross-posted from Credit Writedowns with permission.