Emerging market stocks, bonds and currencies have tumbled as money has fled those regions. This has occured as interest rates have rallied in the U.S.
“Adjustments in core rates markets driven by Fed commentary about its QE policy led to widespread selloffs in EM assets,” note Barclays Christian Keller and Koon Chow in their new Emerging Markets Quarterly report. “This has raised fears about whether investors could abandon the asset class and trigger “sudden stop” scenarios as they prepare for a post- QE world.”
The “sudden stop” is the nightmare scenario where an economy is effectively cut off from the credit markets.
Judging from the magnitude of the drops, you can see why people are freaked out.
However, Keller and Chow think it isn’t the end of the world: ” In our view, we more likely have entered a “long transition” towards a normalization of core market interest rates, in which episodic price corrections can create selective opportunities in EM.”
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