Markets are getting slammed today, and the pain is particularly acute in the emerging markets space.
What’s going on?
Citigroup currency specialist Steven Englander attributes the move to a sudden turn among major world central banks that policy is likely to be tighter sooner than expected.
It could have been that the MPC would find a way of backing away from any suggestion that 7.0% would open a debate on tightening. Now that is less clear.
EM currencies are feeling the pain but the driver is investor fear of a sudden lurch to hawkishness among G10 central banks. Consider the list below of G10 drivers of liquidity concerns:
1) Market worried about Fed tightening and Fed forward guidance
2) Strong UK data and BoE hawkish tilt
3) BoJ member talking about no additional easing and ultimate QE exit
4) SNB macroprudential move on housing
In a recent set of visits to Asia and Switzerland, I was struck by the extent to which investors saw a backing up of US rates, and potentially earlier-than-signaled Fed rate hike as the major risk on the horizon, far more than with respect to a China slowdown or credit crunch. The more concerned among investors saw US rates backing up and even an early policy rate hike as driven by strong US growth or alternatively a sudden realisation that there was not nearly as much excess capacity as had been thought. The more moderately concerned saw markets challenging the Fed on its forward guidance, with the outcome to be data determined. There were very few who saw any sort of downside risk to rates or the US economy. Among Asia clients by far the biggest risk they saw was a pullback in global liquidity which would tighten liquidity conditions in EM. Now combine that with the ambiguity coming out of the BoE on future monetary policy and the comments that leave open the options on monetary policy as the 7.0% unemployment target is approached. Even a month ago the overwhelming view would have been that the MPC would find a way of backing away from any suggestion that 7.0% would open a debate on tightening. Now that is less clear.
For more on the market selloff, see here.