Emerging Markets Hurt By USD And BOJ Inaction

The on-going deterioration in emerging market conditions and currencies remains the main market mover this week. Emerging market debt has been a great investment through the beginning of the year, and was set to remain so as long as the global glut of cheap money continued from the world’s central banks.

However, the past few weeks have seen investors become concerned that the Fed will ‘taper’ their asset purchase plan soon, the Bank of Japan may have already failed in its attempt to support the Japanese economy and the ECB’s ‘whatever it takes’ mentality has fallen by the wayside. No cash, no more rally and this explains recent slips in currencies such as the ZAR, AUD, MXN and INR.

The lack of action from the Bank of Japan continued overnight, as policy makers decided to hold off from additional measures in the face of the recent volatility of Japanese assets. Some had expected to see the Bank’s 1-year loan facility extended by another 12 months but this was roundly dismissed. The yen is stronger and the Nikkei is down as a result.

These rises in yield are being mirrored in the European periphery although stresses from the riots in Turkey and the cancellation of a major Greek privatisation operation are also to blame. The German Supreme Court is also debating the legality of the ECB’s OMT bond-buying program with the obvious possibility that it could be ruled as illegal.

Dollar strength against emerging market assets was helped slightly by the news that the ratings agency S&P was to upgrade its outlook of the US economy to stable from neutral. This basically means that they view the possibility of downgrading the US’s credit rating any further over the next 1-3 years as minimal. Given that France’s PM said the Eurozone crisis was over this weekend we’re surprised that France wasn’t upgraded. I couldn’t reach Francois Hollande for his reaction.

UK data is due at 09.30 and we are looking for a slight improvement in the rate of manufacturing and industrial production in line with recent expansion in PMI releases.