US Tapering and Emerging Markets crisis- what is the connection?

Posted: January 30, 2014 in Uncategorized
Tags: ,

The decision of the US Federal Reserve to decrease by another USD10 billion their QE again is sending the world share market tumbling. 

Why? The Quantitative Easing drove the bond yield in the US to extreme lows. As institutional investors look for yield they had to go overseas (Emerging Market) to find satisfactory yield. This provoked a massive inflows of capital in the Emerging Capital with also negative side effects (Eg inflation in Brasil).

Now the reverse is happening and there is a massive reversal of capital flows (to make you understand USD10 billion in the average monthly portfolio investment in Turkey, India, Brazil, Indonesia, Thailand Ukraine and Chile combined!!).

When you make such a massive hole – two things happens:

– The markets change to adjust to the new reality

-The issues of the fragile economies in the Emerging Market come in evidence. And it will keep on coming up anywhere you find  a fragile economy

Why the US FED is doing this?

– The FED mandate is “taking care of the US, not the world”. Unless there is a contagion effect, the FED will not react of these issues.

– The FED cannot keep on buying forever (its balance sheet is heading towards USD3 trillion

-The FED is actually happy to take off some of the steam from the market as it as been accused to create asset bubbles.  A 10% fall in the market is actually welcomed. Maybe not now…but pretty sure between now and July

So definitely this year will be more volatile. And nobody is yet talking of the Debt Ceiling (7 February)

 

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