If you’re just focused on US equities, or perhaps Japan, then you’ve missed another one of the huge stories of late, which is the bloodbath in emerging market currencies (South African Rand, being high on the list).
So what’s the story behind the selloff?
SocGen’s Kit Juckes has the quick take, in an email blast to clients titled “Dominoes Falling”
Emerging market assets benefited from huge capital inflows in recent years, not because investors were enticed by awesome fundamentals but because they were pushed out of G3 assets by central bank policies, notably the Fed’s massive QE programme. Now, as Fed policy reaches the mildest of turning points, EM assets are vulnerable across the board, the rand being the first of what I suspect will be a series of dominoes to fall over. Our EM strategy team have concluded the EM bull market is over and the link is to last night’s weekly.
Other EM currencies I worry about include: MXN, simply because of its popularity and positioning; Turkish lira because of its balance of payments and dependence on yields to attract capital; and the Thai Baht which may be the focus of concern about Asia-FX. But the lessons of the past are that sell-offs triggered by global policy tightening are pretty indiscriminate.