Archives of “emerging market” tag

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Indonesia central bank says in discussion with Fed for possibility of swap, repo lines

  
  Analysis
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The dollar squeeze in emerging markets is where the problem is at

Indonesia is one of the EM countries where they have higher dollar-denominated debt than they do FX reserves. That is not a good spot to be in during this kind of market environment.

The swap lines offered by the Fed is good to address the needs by local banks on the receiving end as they start to run empty on dollars.
However, the true value of the Fed’s liquidity measures relies on how banks can also help get these dollars to corporates for their working capital requirements or cash buffers.

How effective is all of this remains to be seen but at least there is no reoccurrence of the dollar panic that we saw a few weeks back so that is something I guess.

What were the financial lessons of the 2010s?

  
Analysis, Education
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The next decade is often different from the prior one

The next decade is often different from the prior one
“Financial markets tend to base their expectations of the future on the experiences of the recent past”
That’s a part of human nature that has repeatedly led to folly. Nowhere moreso than in financial markets.
We’ve started a new decade with the same enthusiasm that ended one of the greatest decades in stock markets. Yet few people are out there to remind market participants that the S&P 500 had an average annual total return of negative 0.95% from 2000 through 2009.
One is the WSJ’s Jason Zweig who wrote the Heard on the Street column edited the latest edition of Benjamin Graham’s classic the Intelligent Investor.
In a recent article he highlighted how investors (and traders) tend to pile into trades that have worked recently. A parallel from the 2000s decade as the carry trade. Buying NZD/JPY was a spectacular trade, until it wasn’t. In the most-recent decade the market fell in love with the US dollar.
Market patterns don’t reverse in 10-year cycles like clockwork; there’s no guarantee that the coming decade will be the opposite of the one that just ended. But before you bet that the future will be like the past, it’s worth remembering that this decade hasn’t turned out the way investors predicted it would 10 years ago.
Here is how FX returns looked in the past 10 years:
FX returns from the past decade
What that doesn’t include is emerging markets. The South African rand lost 48%, the Russian ruble 52%, the Brazilian real 56.5% and the Turkish lira 75%.

Morgan Stanley fires four FX traders after concealing $100-$140m loss

  
  Analysis
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Traders may have mismarked emerging markets trades

Morgan Stanley has fired or placed on leave four FX traders suspected of mismarking trades linked to emerging market currencies, Bloomberg reports.
The New York and London-based traders are part of a probe into mismarked trades that concealed a loss of $100-$140 million and is related to options trades.

Nine Reasons Why Greece, PIIGS Approaching Irreversible Slide to Default

  
Analysis, Economy, Education
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  • Like other emerging market nations, it has entered a vicious cycle in which market skepticism creates higher borrowing costs and actually pushes the country closer to the abyss, its demise becoming a self fulfilling prophecy. Once that momentum begins, it is very hard to stop the decline in confidence.
  • Fitch downgrade means no more room to fall before junk bond status: Fitch’s downgrade of 2 notches from BBB+ to BBB- means the next level down is junk bond status, leaving Greece with no collateral to use for borrowing from the ECB. This after the ECB yielded and agreed to accept the BBB+ rating after 2010.
  • Yield on Greek debt is now above many countries with lower, junk-rated bonds: What does that tell you about where Greece’s ratings, and thus yields, are going?
  • A quickening death spiral has started.
  • Extreme austerity measures cut GDP and tax receipts, spur capital flight from banks.
  • EU’s March 25th rescue accord failed, eroding EU credibility: The EU needed a big, timely, decisive rescue package with an announcement shock effect similar to Washington’s guarantee of the too big to fail banks back in September of 2008. It needed to show that no matter what, the EU would not let Greece default, even if it meant effective EU stewardship and economic occupation, and Greece had to agree to it. Instead, neither Greece nor its rescuers have approached the issue with this level of life-or-death seriousness. Both sides have chosen to bicker, bargain, and attempt to hold out for better deals in a deadly game of chicken. The result, the EU’s credibility is damaged, and the EU was the last hope for the markets, as Greece has long ago lost credibility.
  • Greece selling short term bills into a steeply inverted Greek yield curve: The Greek Yield Curve is inverted from 3 months to 5 years. Yet Greece will attempt to sell 26 week and 52 week paper, after having failed to sell long term bonds. Looks like the rates will be too high once again, even if there is demand.
  • Greece needs to find €10 bln by May. The EU and/or IMF will probably give them that one way or another. However this is just delaying the inevitable. Greece needs another estimated €30 bln to make it through the year.

  • EU failure on Greece endangering other PIIGS block members. Spain alone needs to sell €30 bln of bonds in July. It is in better shape than Greece. However, as noted in Contagion Spreads: PIIGS Credit Default Spreads Rising On Greece Default Fears, Spain and its fellow PIIGS colleagues are watching in horror as their own borrowing costs are rising to new highs on fear generated by Greece’s woes. Should Spain need help, there will be little or no cash left in the EU accord. Markets know this, which in turn sparks more fear and higher rates, pushing Spain and the others closer to the edge themselves. Note that Spain and Italy have debt loads many times larger than Greece’s, and that fact alone may doom them unless the EU can inspire confidence and get borrowing rates down.

    • About the author: Cliff Wachtel


    IMF: Dollar Carry-Trade Creating Bubbles Around The World

      
    Analysis, Economy, Education, Global Indices
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    imf-global data

    bubble(1)

    Read a PDF of the IMF’s recent report here.

    The International Monetary Fund (IMF) highlighted the fact that low interest rates in the U.S., plus an apparent “one-way” bet against the dollar has created a global dollar carry-trade that is driving capital flows into emerging markets.

    If not handled properly, this will lead to emerging market asset bubbles, which arguably have already begun to inflate.

    We’ve highlighted before how places like Hong Kong are seeing property prices go through the roof due to low U.S. interest rates. (more…)

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