Investing.com - Financial Markets Worldwide

Emerging Markets In Review

ByDanske Markets
Published 11/15/2013, 01:45 AM
Updated 05/14/2017, 06:45 AM
FTNMX301010
1.56%

Two overall tendencies have dominated global financial markets sentiment. On the one hand, strong US macroeconomic data – for example the October labour market report and Q3 GDP numbers – have increased the fear in the markets that the Federal Reserve will start to scale back quantitative easing (tapering). On the other, inflation seems to be in steep decline everywhere in the world.

The combination of US tapering and domestic disinflation and even a risk of outright deflation in many countries is bad news for many emerging market currencies. The reason is that while the Fed is likely to scale back monetary easing in 2014, many emerging market central banks are facing lower inflation, which opens the door for monetary easing. These tendencies have recently renewed the sell-off in emerging market currencies.

However, while this is bad news for emerging market currencies, it is mostly good news for many emerging market economies. To the extent that the fall in inflation is driven by a positive supply shock (lower commodity prices), this would be good news for noncommodity exporting economies such as Turkey, the Czech Republic and Poland.

However, this also creates new challenges for emerging market central banks. Many of these central banks should welcome weaker currencies to spur growth but we also know that many central banks suffer from a fear of floating, so there is certainly a risk that central banks would react to the currency weakness by tightening monetary policy despite declining inflation.

Finally, Fed tapering and lower commodity prices are not good news for commodityexporting countries such as Russia and South Africa.

To Read the Entire Report Please Click on the pdf File Below.

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