The Jackson Hole Economic Policy Symposium attracted the world’s most-watched central banks, and as expected, policymakers kept their cards close to their chests, doing their best to avoid dropping clues about what they’re going to do next as far as quantitative easing goes. Emerging markets investors were especially interested in hearing what European Central Bank President Mario Draghi had to say. Investors and economists alike have been watching QE effects on EM assets, and the ECB’s pace of tapering is one of the last pieces of the puzzle that are missing.

Instead, what may have emerged from the Jackson Hole meeting are signs that a currency war could be looming.

Direct vs. indirect QE effects on EM assets

In a note in late August, Capital Economics Assistant Economist Oliver Jones noted that in the past, QE effects on EM assets have not been good, but this time, he doesn’t expect significant problems to be caused by tapering in the rest of this year or next year.

He also pointed out that most economists talk about the direct effects of quantitative easing, which occur when those who sell bonds to central banks take the proceeds from those sales and reinvest them somewhere else, such as in emerging markets. However, he argues that the problem with this is that direct QE effects on EM assets are few, causing a weak relationship between QE and flows into EM assets. He argues that the reason is because the bigger QE effects on EM assets are indirect.

Varied effects of quantitative easing

Government bond yields in developed markets have fallen because of quantitative easing because investors expect short-term interest rates to stay low for a long time. Another impact is that demand rises relative to supply. The low yields resulting from the effects of QE trigger a repricing of risk, he adds, not only in developed markets but also in emerging ones.

Jones also points out that the spreads of corporate bonds in both the U.S. and emerging markets have fallen in sync with one another and adds that other bonds in emerging markets have “put in a similar performance in the meantime.” Further, he said EM equities’ price to earnings ratios have climbed in recent years, although the P/Es of their peers in developed markets have risen to a greater extent.