Global Markets Update: Emerging Markets In Turmoil

The US Federal Reserve delivered its clearest signal yet on June 19 that the era of extremely accommodative and unorthodox monetary policy is drawing to a close, with talk of QE tapering and a normalisation in short rates dealing a blow to equities, fixed income and commodities across the board.

The contractionary PMI reading in China, together with the blowout in interbank market rates, added further downward pressure to global assets. For much of the emerging world, the deterioration in the external climate is highlighting a variety of domestic imbalances as policymakers grapple with slowing economic growth in the face of rising inflationary pressures. As for EM assets, in the short term, the severity of this week’s declines suggests that they may well experience a bounce from oversold territory. However, this ongoing mix of external and individual internal risks for many of the key emerging markets will present substantial medium-term headwinds. This gives further support to our three-year old view of US equity outperformance versus the MSCI EM equity index. China’s slowdown will keep pressure on industrial metals such as copper, while a continued rise in US yields and a strengthening of the dollar will see gold fall further. Next support comes in at US$1,100/oz.

Yen Weakness Insufficient For Sustained Japanese Export Revival

Meanwhile, although Japanese exports recorded their highest growth rate in May since April 2012, coming in at 7.6% year-on-year (y-o-y) in seasonally-adjusted terms, we believe that the weakness of the yen is unlikely to have accounted for most of the improvement. Indeed, a comparison of volumes exported over preceding years instead shows that other factors such as global economic conditions and geopolitical tensions play a greater role. Thus, despite Prime Minister Shinzo Abe’s plans to boost export growth, we believe that exports will continue to struggle as businesses refrain from investing and adopting the government’s plans.

Further analysis of current global financial market turmoil and the Japanese economy is available to subscribers at Business Monitor Online.

This Week’s Trivia Question

Last week, we asked, which former Latin American leader was recently sentenced to seven years’ imprisonment for exporting weapons to Croatia and Ecuador in the 1990s in violation of international arms embargoes? Which former Balkan leader fled to that individual’s country after World War II and spent much of his later life there? And which former president (within the past decade) of that Latin American country is of partly Croatian descent? The answers are: a) Carlos Menem, b) Ante Pavelic, the Croatian fascist wartime leader, and c) Nestor Kirchner.

For this week’s question, we are sticking with the theme of Croatia, which is about to join the EU. What item of clothing does Croatia claim credit for inventing? And which famous European explorer is claimed by Croatia as one of its own?