It’s been tough times for emerging markets of late thanks to a variety of factors that have conspired to create something akin to a perfect storm.
You’ve got i) the threat of a trade war weighing on the outlook for global growth, ii) that same trade war threat pushing China towards a devaluation of the yuan, iii) the winding down of DM QE reversing the mad scramble down the quality ladder that heretofore kept a bid under risky assets, iv) rising volatility in EM FX undercutting the viability of the carry trade and perhaps most importantly, v) an unapologetic Fed that seems determined to stay ahead of the game when it comes to ensuring they don’t get caught flat-footed should the left-for-dead Phillips curve suddenly snap back to life like the villain at the end of a slasher flick.
Of course you can expand on all of the factors listed there to discuss the underlying dynamics in more detail. For instance, Fed balance sheet rundown is playing out against a deluge the Treasury supply necessitated by the Trump tax cuts. That supply/demand distortion threatens to soak up dollar liquidity. Rising short rates in the U.S. also mean that “TINA” is dead – that is, cash is now a viable option, which clearly has implications for risk asset appetite at the margin. And on and on.
Well, as we approach quarter end, things are bad. In fact, this is shaping up to be the worst quarter for EM equities and EM FX since Q3 2015 or, more to the point, since the yuan deval.
Here’s equities:
And here’s FX:
Again, the comparisons with 2015 are apt: this time isn’t different to the extent we’re witnessing the same backdrop in China as the yuan depreciates and Chinese equities plunge.
“Investors in exchange-traded funds, who earned 85 percent returns during the two-year rally in emerging-market stocks, also turned pessimistic [during the quarter]”, Bloomberg writes, in a new piece, before noting that “withdrawals from the iShares MSCI Emerging Markets ETF exceeded $5 trillion in the second quarter, rivaling levels seen during the euro-area debt crisis and the winding down of Federal Reserve stimulus in 2014.”
