1. Issues in paradise: Over the last ten years, a stream of accessible funds flowed into emerging markets.
This trend is now reversing. Increasing interest rates, combined with trade disputes, have triggered a mass exit from certain emerging markets. The Turkish lira and Argentine peso have plummeted, and China’s stock market is currently bearish.
Challenges that were previously hidden by remarkably low interest rates are now coming to light.
“The tide … is ebbed and some nations have been, or will find themselves, unprepared,” stated Jason Daw, head of emerging markets strategy at Societe Generale, in a client correspondence last week.
Developing nations may not see relief in the near future. The Federal Reserve is anticipated to continue to gradually raise interest rates. These rate increases signify a vote of confidence in the robust American economy, which continues to support US stock markets.
However, the conclusion of easy monetary policy — exacerbated by escalating trade disputes — is creating substantial difficulties elsewhere globally.
Increased rates bolster the US dollar, complicating matters for countries like Turkey that have accumulated significant dollar-denominated debt. Furthermore, these rate hikes have attracted capital that had previously ventured to more remote regions back to the United States.
Not all emerging markets are experiencing the turmoil uniformly. Nations like South Korea and Thailand are seemingly weathering this storm relatively well. This marks a significant contrast compared to two decades ago when an Asian financial crisis initiated with the Thai baht’s collapse.
On the other hand, countries like Turkey have been severely impacted. The Turkish central bank had to implement an unexpectedly aggressive interest rate hike last week to stabilize the lira. Similarly, Argentina’s central bank increased interest rates to 60%. The Russian central bank, which has faced severe sanctions from the US, surprised investors on Friday with its first interest rate hike since 2014. South Africa’s central bank, which convenes on Thursday, may also need to follow suit.
Daw pointed out that the nations most vulnerable to the pressures on emerging markets share a few key characteristics.
Firstly, they have accumulated substantial dollar-denominated debt — much of which is due shortly. Secondly, these nations exhibit relatively high levels of total debt with minimal emergency reserves. Additionally, these emerging markets are grappling with trade and budget deficits.
So, which countries fall into these categories? Daw identified Turkey, South Africa, Malaysia, India, and Indonesia as among the most susceptible.
“The misallocation of capital following a decade of inexpensive money is finally being revealed,” Daw commented.
2. Upcoming earnings: This week sees a slower pace for earnings reports, though several notable companies such as Oracle, FedEx, General Mills, AutoZone, and the parent company of Olive Garden, Darden Restaurants, are set to release their results. The strong economy and reduced tax rates have bolstered corporate profits.
3. New products from Apple: Apple is launching its new iPhone models on Friday. Additionally, iOS 12, updates for the Apple Watch, and software updates for the HomePod and tvOS devices are set for release. Apple’s (AAPL) stock has risen by 32% this year.
4. S&P reclassifications: Significant adjustments are taking place within the S&P 500 on Friday, as several prominent technology and telecommunications companies will transition to the communication services sector, including Facebook (FB), Netflix (NFLX), and Alphabet (GOOGL).
5. This week ahead:
Monday — Oracle (ORCL) and FedEx (FDX) earnings; launch of iOS 12.
Tuesday — Earnings reports for General Mills (GIS) and AutoZone (AZO); US Treasury foreign bond ownership data.
Thursday — Earnings from Darden (DRI) Restaurants and Micron Technology (MU).
Friday — S&P reclassification; launch of new iPhones and Apple Watch in stores.
UJ (New York) Originally published September 16, 2018: 7:21 AM ET
