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Round Up – Emerging Market Concerns

James Boston
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Finally a pause in the emerging markets sell off that has been troubling investors for the past week. Slowing Chinese growth and a reduction in the US Federal Reserve stimulus program has seen a steady flow of funds out of emerging market ‘risk assets’. The current respite is ahead of the US FOMC meeting this week, likely Fed actions are well documented but markets will be watching the carefully worded statement that follows Federal Reserve meetings for clues as to the pace of US stimulus reduction.

The US Fed is walking a fine line, there is a requirement to address the needs of the domestic economy but this must be balanced with the ramifications this will have on developing economies. These emerging market economies now account for almost 40% of global GDP, twice that of only 2 decades ago. In addition these developing economies directly purchase 15% of the goods and services of the companies in the S&P500 index.

Emerging market troubles therefore weigh on growth of developing economies, it is not that there is a risk of full-scale contagion, rather the concern is that developed economies are still in a state of fragile recovery and global shocks, no matter how subtle, create unwelcome risks to this recovery.

The rout in emerging economies is somewhat unbalanced and limited to a few key players, notably Argentina and Turkey are contributing the most concern. The latter of these is holding an emergency monetary policy meeting today as pressure mounts for a hike in Turkish interest rates in order to defend the plummeting Turkish Lira. In an unusual step the Central Bank of Turkey has scheduled a press release for midnight tonight, this is leading to speculation that the announcement will be particularly market sensitive and there is already talk that Turkey is considering capital controls.

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