COLUMN-Emerging markets throw a Fed rate hike sulk: James Saft
(The opinions expressed here are those of the author, a columnist for Reuters)
By James Saft
June 9 (Reuters) - With the prospect of a U.S. interest rate rise this year becoming more realistic, emerging markets will throw, if not quite yet a tantrum, then a sulk.
Emerging market stocks suffered their 11th consecutive losing day Monday, the longest such streak since 1990. Reminiscent of, if less intense than, the 'taper tantrum' of 2013, when the prospect of slowing Fed bond purchases upset emerging markets.
While uncertainty in the wake of an upset election result in Turkey did not help, Friday's better-than-expected U.S. employment report and the ongoing dawning that interest rates are on the way up were the underlying cause of the sell-off.
The arc of the fall so far is not too terrible, with the MSCI emerging markets index down a bit less than 10 percent from its recent peak. If the Fed does next week give indications that a 2015 rate rise is in the offing, perhaps as early as September, emerging markets will face something they like very little: a tightening cycle with global monetary conditions becoming increasingly less welcoming.
That's especially true for countries such as Brazil, India, Indonesia, South Africa and Turkey which depend on attracting global capital flows to finance themselves.
"Rising U.S. interest rates will tend to put the most pressure on those countries with significant external imbalances and weak institutional frameworks. However, it is the pace of any tightening that will be most critical. As long as policy accommodation is withdrawn slowly and long-term interest rates increase only gradually, the probability of a systemic crisis should remain low," economists Jeremy Lawson and Nicolas Jaquier of Edinburgh-based fund manager Standard Life said in a recent update to institutional investors.
Market interest rates have risen pretty quickly in recent weeks, taking the benchmark 10-year U.S. Treasury note yield to 2.38 percent from 1.85 percent since mid-April. Yet financial markets may still have a ways to go to catch up to reality when it comes to discounting the pace at which the Fed will be forced, and forced is a reasonable term here, to raise rates. Continuación...