Emerging markets crisis deepens

Sell side analysis really is rubbish some days. I watched yesterday as various “analysts” declared the EM crisis over after Turkey hiked interest rates from 7.75% to 12% in one day. As I said:

This follows India’s 25bps hike yesterday. While wider markets are taking succor from these moves the next penny to drop will be slowing growth, which will be under serious and perilous revision in affected nations. These are the extreme examples but tightening is taking place across emerging markets, 40% of the global economy. I’ll take a punt and say taper pauses after the March tightening at ongoing Fed purchases of $45 billion per month.

That penny dropped last night and the Turkish lira collapsed again, to new lows, on fears of slowing growth:


South Africa added to the fears by hiking interest rates 50bps overnight yet its currency fell as well:


Indeed, contagion is spreading. Emerging markets now watching currencies take a flogging include Argentina:










While Mexico and Hungary are threatening:


In better news, the Indian rupee appears to be stabilising:


The Australian dollar also failed to rally:


Meanwhile, the Japanese yen is undoing Abenomics on “risk off” flows, also hurting growth in the great mercantilist state in short order:


The US dollar was itself relatively stable and although bonds were bid last night, yields are holding on the expectation of more taper. Stocks were thumped of course:


So, if dramatic rate hikes aren’t going to reverse the rush for the exits in emerging markets, what will? One option is an aggressive Chinese stimulus but that would kill rebalancing.

If history is a guide then CitiFX has an answer:

  • 1989-1991: Housing and savings and loan crisis: Fed eases aggressively as economy enters deep recession1992-1994: Existing financial architecture in Europe (ERM) blows apart
  • 1995-1998: European convergence trade in both FX and Bond spreads keeps European currencies relatively stable vis a vis the USD with a good rally in 1998.By 1996 BUBA has lowered the discount rate to 2.5% while US rates remain well below the pre-crisis highs of 9.75% in 1989.
  • The carry trade and capital flow into emerging markets (Asia in particular) is center stage
  • March 1997: In a seemingly “innocuous” move the Fed “tinkers” by raising rates 25 basis points.
  • April 1997: Japan raises its consumption tax as USDJPY has rallied from a post Kobe Earthquake low of 79.7 to 127.50 . USDJPY collapse to 111 by June
  • June 1997-Jan 1998: Severe reaction in Asian currencies as “hot money flees”
  • August-October 1998: Russia defaults, Long term capital folds and the Fed eases aggressively as the equity market drops 22% (S&P)

Fed eases aggressively as the equity market drops! A gold breakout will warn you in advance:



      • I reckon Graeme Wheeler’s kept his powder dry, Chris. He should have raised today, but the Dow was off 200 odd when 9.00am rolled around, and other indicators are looking a bit iffy. So a delay was prudent. As for March? The same rationale applies…….
        (NB: The LVR’s appear to just be storing up an ever increasing number buyers behind the ‘temporary’ changes. Unless they are made permanent, it’s just a waiting game that the speculators will win)

      • LVR caps will be in place as long as it is needed. Why would the RBNZ move? Consensus is tightening its currency and will dampen tradable inflation. Its housing market is slowing more quickly than anyone thought possible. China is slowing. Emerging markets are melting. Growth has been good but the the slowing is already baked in. Where’s the need?

      • Janet, the fact the Dow was off 200p would not have even come into their mindset. They will hike in March. Wheeler speaks tomorrow (10:00 AEST) in Christchurch and sure he’ll give more away then

      • You may very well be right, Chris. But would you want to be the Governor of any CB that raises rates on the very day the world came to an end? “The Dow was down 200 point, man! Could you see the writing on the wall, and you still raised rates?” Time is something that Central banker believe is on their side. Today, I believe, Graeme Wheeler used it.

      • migtronixMEMBER

        I think you’re right Janet he baulked and used he’s most trusted tool – prevarication. Wish he’d given me time to buy AUDNZD contracts.

      • And this from Interest.co.nz:

        “Approvals to build new houses – excluding apartments – shot up by 10.7% on a seasonally adjusted basis in December, according to Statistics New Zealand.”

  1. An interesting post from an NZ site responding to Graeme Wheeler’s comment that there is ‘momentum in the NZ economy”. Perhaps there was less choice than we imagine to any possibility of an interest rate rise?

    ” What momentum. Theres none of that here in Christchurch. The engineering sector is dead quiet. The only people busy are painters, gibstoppers etc. I’ve had my engineering business for 7 years now and this is the worst year we’ve ever had and other businesses are the same. The spin doctors must be working overtime to convince us of an economic boom.
    (NB: Christchurch is supposed to be ‘where it’s all happening’ with the re-build and all…)

    • migtronixMEMBER

      Thanks for that. So LVR restrictions to be pulled back? At any rate reversing 5 years of carry won’t be fun, I can’t see how rates won’t go up soon – not sure TSY10 will see the lows again even if they do soften as macro polo points to.

  2. Good post but the lira didn’t hit new lows last night. USDTRY spiked to 2.39 before the emergency meeting was announced

  3. Looking around the web last night about Turkey it became clear that this country has also had an outrageous property bubble. The country was running a CAD of about 6% of GDP. I think we have averaged around 4-5?. Apart from political strife this seems to be the cause of the current problems. Money rushed in now its rushing out, on the realisation capital has not been invested it has been consumed. India & Indonesia have had bubbly housing markets too , with all the usual local spivs and parasites extolling the virtues of the wealth effect in their local media. Large CADs are always explained away as the funding of investment for future growth. How could this possibly be the case?
    A country uses all its domestic savings then finds another mountain of business opportunities to the tune of 6% of GDP PA!.
    If business was so awash in opportunity for investment how could unemployment be as high as it is in these places? Let alone our own country?

    • Great points Rod !

      It always amuses me when persistent CAD especially above 5% of GDP is explained away as productive investment. You can prove this is complete BS with a simple Excel spreadsheet and about 5 mins effort. Yet our business leaders have repeated the same meme so often that it now seems to contain a kernel of truth.

      Aren’t we lucky our average Aussie High school student has such pitiful math skills.

  4. Indonesia looks vulnerable. Large foreign currency borrowings, big CAD (most of which is income deficit).