Today’s commentary
Summary: In many different emerging markets, the economy has unexpectedly weakened. We are seeing downturns everywhere from Mexico and Brazil in Latin America to Indonesia, India and Thailand in Asia. At this point there is no common thread on why the weakness is so widespread but the most troubling country is India.
I am combining today’s commentary with a bunch of articles from the links to highlight the situation in EM. All of the news flow coming out of EM is negative. We are seeing actual falls in GDP not just a fall in GDP growth in Mexico and Thailand for example. But India is where the crisis is reaching epic proportions. The currency has hit another record low amid widespread reports of central bank intervention. Meanwhile both bond and equity markets in India are being savaged and it is likely that economic forecasts will have to drop considerably.
As I mentioned yesterday, I am concerned about this becoming a full blown crisis. The post yesterday was on currency flows and market volatility. But that is only one part of the picture. It is the combination of market volatility, capital flight and economic weakness that makes for a toxic brew. In countries like Thailand, where household debt is high for EM at 80% of GDP, the private debt overhang could mean significant headwinds from consumer deleveraging unless authorities get this under control.
India is the biggest concern at the moment. This is a large country, one of the four BRICs and it is seeing real economic turmoil, equity and bond market crashes as well as a currency crash, triggering increased inflation. Moreover, the government finances are weak, making the policy space available limited on both the fiscal and monetary side. Given the interconnectedness of the financial markets and India’s large size in all of EM, any problem in India could have a substantial impact on other markets. What we should be concerned about is increased market correlations because this is the hallmark of a crisis. Hedge strategies fail as markets across industries, asset classes, countries and currencies fall in tandem during a wholesale flight to safety. The question is what the safe havens this go round would be: German Bunds, the Swiss Franc, maybe gold. Certainly US Treasuries will catch a bid especially given the oversold conditions in the Treasury market.
We should be watching this story closely because it is not just a passing phase. Again, we are seeing weakness in the real economy, currency and stock and bond markets across countries in EM. Caution is definitely warranted and risk-off is the right call in those conditions.
Related reading
India on the brink of its own financial crisis | Business | The Guardian
“In a reprise of the 1997-98 Asian crisis, India’s stock market is plunging, bond yields are nudging 10% and capital is flooding out of the country”
Indian rupee plunges to record low despite RBI intervention | Reuters
“The rupee fell 2 percent to a record low of 64.5450 to the dollar despite what traders said was sporadic central bank intervention in both the spot and forward markets.
Measures by the Reserve Bank of India late on Tuesday to support longer-dated debt sent prices of beaten-down bonds sharply higher but also led traders to question the central bank’s resolve in defending the currency.”
Thailand Cuts Growth Outlook as Economy Enters Recession – Bloomberg
“Thailand cut its 2013 growth forecast as the country entered recession for the first time since the global financial crisis, with rising household debt limiting central bank scope to support the economy. Stocks fell.
Gross domestic product unexpectedly shrank 0.3 percent in the three months through June from the previous quarter, when it contracted a revised 1.7 percent, the National Economic and Social Development Board said in Bangkok today. Only one of 11 analysts surveyed had predicted a decline. The economy rose a less-than-estimated 2.8 percent from a year earlier.”
Mexico slashes growth forecasts amid first contraction in four years – Telegraph
“The country’s finance ministry said it now expected the economy to go by 1.8pc this year, from a previous forecast of 3.1pc. The government had already cut its prediction from 3.5pc earlier this year. “
Mexican Economy Contracted in Second Quarter – WSJ.com
“Gross domestic product shrank 0.74% from the first quarter in seasonally adjusted terms, the National Statistics Institute, or Inegi, said Tuesday. That translates into an annualized decline of 2.9%.
Mexico has become another weak patch in the global economy, along with big emerging markets like Brazil which has been held back by a decline in commodity prices. The sluggish activity is adding a sense of urgency to the government of President Enrique Peña Nieto to press on with his reform agenda, including the recently proposed overhaul of Mexico’s state-run energy sector by allowing a far bigger role for private companies.”
Indonesia Rupiah, Stocks Plummet on Current-Account Gap – Bloomberg
“Indonesia’s rupiah fell to 10,500 per dollar for the first time since 2009, stocks dropped by the most in 22 months and government bonds plunged after the current-account deficit widened to a record last quarter.
The Jakarta Composite Index of shares has fallen 8 percent in two days, and is now the world’s worst performer this quarter. The yield on 10-year notes surged to the highest since March 2011 after Bank Indonesia said late Aug. 16 the current-account shortfall was $9.8 billion, the largest in data compiled by Bloomberg going back to 1989. Inflation quickened to a four-year high and economic growth slowed to the least since 2010, figures showed last week. “
BBC News – China home prices continue to rise in July
“Prices of new houses rose in 69 of 70 major cities, compared with a year ago.
China has unveiled a series of measures in recent times to curb speculation in the sector, amid concerns of asset bubbles forming in the country.
Analysts said that despite the curbs, demand for property investment remained high in China, driving up prices. “
Germany Profiting from Euro Crisis Through Low Interest Rates – SPIEGEL ONLINE
The numbers here are dubious but this is the kind of stuff you use to tout your party’s case during an election. For people outside of Germany, it seems appalling that the numbers would stack up this way. My math shows a return of 68x taxpayer’s money using this calculation.
“Germany has profited from the euro crisis to the tune of 41 billion euros in reduced interest payments. Strong demand for its debt has cut yields and made it cheaper for Germany to borrow. Meanwhile, the crisis has only cost Germany a mere 599 million euros thus far.”
Also see here: https://www.creditwritedowns.com/2012/07/germany-biggest-winner-euro-fixed-exchange-rates.html
The emerging market economies are getting savaged
Today’s commentary
Summary: In many different emerging markets, the economy has unexpectedly weakened. We are seeing downturns everywhere from Mexico and Brazil in Latin America to Indonesia, India and Thailand in Asia. At this point there is no common thread on why the weakness is so widespread but the most troubling country is India.
I am combining today’s commentary with a bunch of articles from the links to highlight the situation in EM. All of the news flow coming out of EM is negative. We are seeing actual falls in GDP not just a fall in GDP growth in Mexico and Thailand for example. But India is where the crisis is reaching epic proportions. The currency has hit another record low amid widespread reports of central bank intervention. Meanwhile both bond and equity markets in India are being savaged and it is likely that economic forecasts will have to drop considerably.
As I mentioned yesterday, I am concerned about this becoming a full blown crisis. The post yesterday was on currency flows and market volatility. But that is only one part of the picture. It is the combination of market volatility, capital flight and economic weakness that makes for a toxic brew. In countries like Thailand, where household debt is high for EM at 80% of GDP, the private debt overhang could mean significant headwinds from consumer deleveraging unless authorities get this under control.
India is the biggest concern at the moment. This is a large country, one of the four BRICs and it is seeing real economic turmoil, equity and bond market crashes as well as a currency crash, triggering increased inflation. Moreover, the government finances are weak, making the policy space available limited on both the fiscal and monetary side. Given the interconnectedness of the financial markets and India’s large size in all of EM, any problem in India could have a substantial impact on other markets. What we should be concerned about is increased market correlations because this is the hallmark of a crisis. Hedge strategies fail as markets across industries, asset classes, countries and currencies fall in tandem during a wholesale flight to safety. The question is what the safe havens this go round would be: German Bunds, the Swiss Franc, maybe gold. Certainly US Treasuries will catch a bid especially given the oversold conditions in the Treasury market.
We should be watching this story closely because it is not just a passing phase. Again, we are seeing weakness in the real economy, currency and stock and bond markets across countries in EM. Caution is definitely warranted and risk-off is the right call in those conditions.
Related reading
India on the brink of its own financial crisis | Business | The Guardian
“In a reprise of the 1997-98 Asian crisis, India’s stock market is plunging, bond yields are nudging 10% and capital is flooding out of the country”
Indian rupee plunges to record low despite RBI intervention | Reuters
“The rupee fell 2 percent to a record low of 64.5450 to the dollar despite what traders said was sporadic central bank intervention in both the spot and forward markets.
Measures by the Reserve Bank of India late on Tuesday to support longer-dated debt sent prices of beaten-down bonds sharply higher but also led traders to question the central bank’s resolve in defending the currency.”
Thailand Cuts Growth Outlook as Economy Enters Recession – Bloomberg
“Thailand cut its 2013 growth forecast as the country entered recession for the first time since the global financial crisis, with rising household debt limiting central bank scope to support the economy. Stocks fell.
Gross domestic product unexpectedly shrank 0.3 percent in the three months through June from the previous quarter, when it contracted a revised 1.7 percent, the National Economic and Social Development Board said in Bangkok today. Only one of 11 analysts surveyed had predicted a decline. The economy rose a less-than-estimated 2.8 percent from a year earlier.”
Mexico slashes growth forecasts amid first contraction in four years – Telegraph
“The country’s finance ministry said it now expected the economy to go by 1.8pc this year, from a previous forecast of 3.1pc. The government had already cut its prediction from 3.5pc earlier this year. “
Mexican Economy Contracted in Second Quarter – WSJ.com
“Gross domestic product shrank 0.74% from the first quarter in seasonally adjusted terms, the National Statistics Institute, or Inegi, said Tuesday. That translates into an annualized decline of 2.9%.
Mexico has become another weak patch in the global economy, along with big emerging markets like Brazil which has been held back by a decline in commodity prices. The sluggish activity is adding a sense of urgency to the government of President Enrique Peña Nieto to press on with his reform agenda, including the recently proposed overhaul of Mexico’s state-run energy sector by allowing a far bigger role for private companies.”
Indonesia Rupiah, Stocks Plummet on Current-Account Gap – Bloomberg
“Indonesia’s rupiah fell to 10,500 per dollar for the first time since 2009, stocks dropped by the most in 22 months and government bonds plunged after the current-account deficit widened to a record last quarter.
The Jakarta Composite Index of shares has fallen 8 percent in two days, and is now the world’s worst performer this quarter. The yield on 10-year notes surged to the highest since March 2011 after Bank Indonesia said late Aug. 16 the current-account shortfall was $9.8 billion, the largest in data compiled by Bloomberg going back to 1989. Inflation quickened to a four-year high and economic growth slowed to the least since 2010, figures showed last week. “
BBC News – China home prices continue to rise in July
“Prices of new houses rose in 69 of 70 major cities, compared with a year ago.
China has unveiled a series of measures in recent times to curb speculation in the sector, amid concerns of asset bubbles forming in the country.
Analysts said that despite the curbs, demand for property investment remained high in China, driving up prices. “
Germany Profiting from Euro Crisis Through Low Interest Rates – SPIEGEL ONLINE
The numbers here are dubious but this is the kind of stuff you use to tout your party’s case during an election. For people outside of Germany, it seems appalling that the numbers would stack up this way. My math shows a return of 68x taxpayer’s money using this calculation.
“Germany has profited from the euro crisis to the tune of 41 billion euros in reduced interest payments. Strong demand for its debt has cut yields and made it cheaper for Germany to borrow. Meanwhile, the crisis has only cost Germany a mere 599 million euros thus far.”
Also see here: https://www.creditwritedowns.com/2012/07/germany-biggest-winner-euro-fixed-exchange-rates.html