We have documented here and here the progressive decoupling of risky assets, as well as the breakup of the traditional negative correlation between equities and safe haven bonds. These two phenomena marked the end of the so-called “risk on/risk off” paradigm which characterized the post-2008 world until Draghi’s “whatever it takes” speech in 2012.
What we [...]
Emerging markets have been engulfed in a vicious spiral since the Fed’s tapering last year (Figures 1 and 2). The rise of US rates has triggered important outflows from deficit countries, resulting in depreciation of their currencies and debt/equity assets.
A first tentative bounce had occurred in the fall of 2013, but, unfortunately, it has been [...]
Commodities’ performance has been lackluster since 2006 (Figure 1). On table 1, we note that, even though the spot performance was very good, it was eaten up by the negative roll return. This is due to the steep contango of commodities’ forward curves from 2006 to 2012.
However, Figure 2 shows a revival of the commodities’ [...]
As analyzed by the Fed watcher, Tim Duy, the FOMC was perceived significantly more hawkish than expected. The unemployment trigger (6.5%) was dropped but the FOMC has also renounced to accept an inflation rate 0.5% above the long term objective of 2%. Tim Duy thinks that the 2% inflation level is no longer a target [...]
Last week, we experienced an interesting turnaround in the ECB communication. For the first time, the ECB expressed its concern regarding the level of the exchange rate, arguing that the euro strength aggravates the problem of insufficient inflation. The speech has had the desired effect on the euro but the impact has been quite short-lived, [...]
Among the most fragile countries, the currency plays a crucial role on financial stability. As showed in our previous research, emerging currencies serve as a link between emerging equities and emerging bonds.
Figure 1 shows that, while the currencies of Turkey, South Africa and Russia are still depressed, those of Indonesia and Brazil are stabilizing and [...]
The Ukraine war is another sign of the emerging countries vulnerabilities, which had already been observed in MENA (Egypt, Syria, Sudan, Turkey…) and South America (Argentina, Venezuela). It is the result of a mix of political instabilities, social uprising, monetary fragility, debt overhang and current account deficit.
The collapse of the political regime in Ukraine has [...]
The outlook of the dollar has been indecisive since Mario Draghi’s pledge to “do whatever it takes to save the euro” and the subsequent announcement of the QE3 Federal Reserve program. For sure, the emerging currencies have been hardly hit but the euro has served too as a repatriation currency during market stresses.
As showed in [...]
As liquidity comes back to risk seeking territory (figure 3), equities are likely to rise again but surely less than in 2013.
Nevertheless, the uncertainties about the emerging countries’ outlook will weigh on financial markets and deteriorate the global economic outlook. As a matter of fact, Chinese authorities will maintain a tightening mode in liquidity so [...]
The current emerging markets rout happens at the worst moment for Europe. As Eurozone countries have made the choice to export their way out of debt, they have made themselves increasingly vulnerable to the growth prospects in emerging economies.
The ongoing landing of the Chinese credit bubble and the sudden stop experienced by emerging countries running [...]