Emerging Markets Catch Cold, U.S. And Europe Sneeze: Shades Of 1997?
Financial markets were on tenterhooks Wednesday over the actions of policymakers — but it wasn’t the Fed meeting in focus and it definitely wasn’t the president’s State of the Union. Continuing a recent trend, financial markets were instead fixated on goings on in emerging markets.
Overnight, Turkey’s central bank sharply raised borrowing rates in an effort to support its flagging currency. But after rallying sharply vs. the dollar, the lira turned lower again Wednesday and the nation’s main stock bourse slumped. Other emerging market currencies and stocks fell in tandem while major European markets also slumped. The Turkish turnaround spilled over into U.S. futures, which had rallied Tuesday evening along with Asian markets after Turkey’s central bank acted.
Update: As of 2pm ET, the Dow was down 0.9% while the S&P was off 0.75%.
There are several factors at work here that potentially explain why developments in Turkey, Argentina, India and other emerging markets are affecting major U.S. and European markets. In a nutshell, upheaval in the emerging markets is simultaneously a cause and a reaction to a global “flight from risk” and search for safety, as represented by the U.S. dollar, Treasuries, gold and Japanese yen.
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Secondarily, perhaps, there is also a sense that a global tightening cycle has begun. Central bankers in South Africa, India, Russia and Argentina took steps this week to fight inflation and support local currencies. And, of course, the Federal Reserve is widely expected to resume its tapering program at today’s policy meeting, which is more a reduction of easing vs. actual tightening but still a step in a less-easy direction.
In the accompanying video, Yahoo Finance’s Rick Newman and I discuss how the emerging markets are causing headaches for U.S. equity bulls. As Newman notes, there are echoes of the recent crisis in Greece and Cyprus, where developments in seemingly periphery nations caused unrest in global markets, at least for a time. And just as the terms PIGS was used to describe Europe’s crisis a few years ago, and BRICS came to represent opportunities in emerging markets in the early 2000s, Wall Street has a new favorite shorthand to describe the latest upheaval: “The Fragile Five.”
A Morgan Stanley analyst is credited with coining that term to describe Turkey, Brazil, India, South Africa and Indonesia — five nations facing separate but related challenges due to their over-reliance on foreign capital, which has recently been heading for the exits.
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The current crisis also has echoes of the 1997 ‘Asian Contagion’ in that certain global leaders are blaming the press and unnamed “speculators” for the challenges facing their respective nations.
Turkish Prime Minister Recep Tayyip Erdogan, who has previously blamed “the interest rate lobby” for his country’s financial woes, yesterday blamed the media.
“My dear brothers these organizations have always stolen the national will in this country. They have pocketed the resource and energy of this country,” Erdogan said in a speech to parliament. “Is it only BBC? Also The Wall Street Journal. Who are the bosses of these newspapers? Who own these newspapers?”
Meanwhile, Argentina’s President Cristina Kirschner described banks and big business as “people who want us to eat soup again, but this time with a fork” while her cabinet minister Jorge Capitanich said: “The modus operandi of these speculative attacks is on all fronts with a single objective: to buy depreciated financial and hard assets.”
If the Asian crisis is a guide, these kind of comments typically occur closer to the beginning of a crisis vs. the end. And just like with the ‘Asian Tiger’ economies of the 1990s, it seems today’s emerging market leaders don’t realize that global capitalism is a two-way street, with money flowing both in AND out, depending on the opportunity and the mood of the market, which has turned dark and stormy in 2014.