EM Sell-Off: Here We Go Again?

http://blogs.ft.com/beyond-brics/2013/06/19/em-sell-off-part-2/#ixzz2WqlrJ62N Jun 19, 2013 9:32pm by Pan Kwan Yuk Emerging market assets suffered another bout of sell-off on Wednesday after the US Federal Reserve said it could start reducing the pace of its bond buying programme this year and end it altogether around the middle of next year. The MSCI Emerging Markets Index fell 1.3 per cent to close at its lowest level since last September. With bourses in Asia and Europe closed by the time the Federal Open Market Committee issued its statement, Latin American stocks bore the brunt of the sell-off. Brazil’s Bovespa erased earlier gains to close down 3.2 per cent at 47,869.64, its lowest close since April 2009. Mexico was not spared. The IPC index fell more than 1 per cent, taking its losses this year to 10 per cent. “The market did not find much that was positive to take away from the FOMC statement,” Michael Cattano, head of LatAm Corporate Credit Trading at Barclays, told beyondbrics. “Tapering is still on schedule but the statement does not appear to have calmed people’s nerves. That’s why you are seeing the sell-off. “It’s likely that this prompts another round of selling,” he added. “EM is more vulnerable because a lot of money – some speculative – has come into EM globally over the past decade. That is reversing in part – you can see this playing out in the currency market. The Mexican peso and the Brazilian real have been under pressure.” Indeed, EM currencies, which have only started stablising this week after two weeks of intense sell-off, came under renewed attack on Wednesday. The real fell nearly 2 per cent against the dollar to close at R$2.2198, a four year low. The slide came despite moves by Brazil to remove key currency controls – including a financial transactions tax on fixed income investments and currency derivatives – to shore up the currency. The Mexican peso also weakened against the dollar, dropping 2.3 per cent to hit 13.19 pesos. It had traded 0.3 per cent higher prior to the FOMC statement. As for EM debt, Sebastian Azumendi, head of LatAm credit trading at Mizuho, told beyondbrics: All the Treasuries have fallen apart. The EM credit market is bidless. Spreads between EM bonds and US Treasury have widened by 7bps after the FOMC statement came out. While some EM fund managers have seen the recent sell-off as a buying opportunity, not everyone is convinced. Benoit Anne over at Société Générale thinks more pain could be on the way: We now know where the Fed stands, and I must say this is not particularly good news for global emerging markets (GEM). Yes, QE tapering is on the table, as was signalled before, and that means that the process of Fed policy repricing needs to move forward. The market implication is that UST yields may push higher, not only straight away but more importantly as a strategic theme, thereby triggering a stronger USD, weaker EM currencies, higher local rates and steeper EM curves in the process. In other words, the major change of top-down thematic is being reconfirmed today, and while the moves have already been severe in many markets, I would argue that today’s signals will kick off the second leg of the GEM sell-off. In short, considerably more pain on the way. This may come across as quite alarming for a number of EM investors, but at least, I would argue that the Fed manages the move towards the exit quite well. The Fed now has embraced its global market influence, and the risk of a surprise and brutal shift in US monetary policy is a thing of the remote past. So 1990s in fact. This is being well signalled, and expectations are fairly well managed. This to me suggests that while the big picture is quite obvious, the market moves in the period ahead may be more orderly than what we had observed over the past few weeks. Expect the sell-off to continue when markets in Asia open. Taylor Scott International