The top of the Business Insider right now is a shot of a huge wave.
That wave isn’t just a dramatic image (although that’s nice).
It represents a popular metaphor to explain what’s happening in markets.
After the Fed launched Quantitative Easing post-crisis, there was a huge liquidity wave that rushed towards emerging markets in search of higher yields.
Now the view is that the tide is coming out, and the water is rushing in other directions. The liquidity is coming back to developed markets, leaving emerging markets increasingly parched (hence the decline in emerging market assets lately).
The situation can be explained in two charts.
The first chart is real interest rates in the United States, which have been surging lately.
FREDHigher real interest rates are appealing to investors, because it implies a higher ability to get a return in said economy and/or currency. Suddenly US assets are appealing because of these higher real interest rates.
And emerging markets?
James von Simson posted this chart showing the huge outflows from emerging market funds last week.
The worst outflows in years. The water is rushing in the other direction.
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