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Another taper tantrum? 3 emerging markets to avoid as US treasury yields rise

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State Street has revealed details about the findings of research it conducted into the impacts tapering by the US Federal Reserve could have on emerging markets.

The financial services giant says there are three emerging market economies, in particular, that could be hit hardest.

The details of the study, conducted earlier this year, were outlined by State Street macro strategist, Emily Weis, during an interview today on Bloomberg Daybreak Asia.

“In general we find that a 50 basis point move higher in the US yields can bring some substantial pain for emerging markets, both on the FX side and the local debt side,” said Ms Weis.

“The ones that are most impacted tend to be the likes of Mexico, Turkey and Indonesia – three markets that have a lot of foreign participation and also have some other idiosyncratic issues that make them more vulnerable in risk-off times.

No taper tantrum yet

In 2013, as the US Fed began tapering following years of quantitative easing in the wake of the global financial crisis, the ripple effects in emerging markets became known as the “taper tantrum”.

This is how Otaviano Canuto, a senior fellow on Global Economics and Development at the Brookings Institution, describes the events.

“In June of that year, then-Fed Chair Ben Bernanke suggested that the FOMC might soon start to slow down its bond purchases. With that one passing statement, Bernanke unwittingly triggered a wave of interest-rate hikes and capital flight from emerging markets.

“At the time, the “fragile five” (South Africa, Brazil, India, Indonesia, and Turkey) had high current-account deficits and a strong dependence on inflows of foreign capital. For years, they had experienced the spillover effects of ultra-loose U.S. monetary policies, which sent investors seeking higher yields in emerging markets.

“When Bernanke raised the possibility of gradual monetary-policy tightening, investors briefly panicked.”

So, could we soon see a repeat of the 2013 taper tantrum as inflation lingers and talk of tightening monetary policy intensifies?

Ms Weis says she doesn’t think so, but expect more volatility in emerging markets.

“We are looking in the medium term for a little bit of pain but not quite reflective of a tantrum just yet… There are quite a lot off differences this time around when we compare it to the 2013 taper tantrum.

“This time around the taper has been very well communicated and projected by Fed officials, on top of that a lot of emerging markets have reduced some of those external vulnerabilities that made them more vulnerable in 2013.

“On the negatives, there are still a lot of idiosyncratic risks to pay attention to. We have seen the market has been able to ignore some of these risk for a very long time, particularly very specific stories like Evergrande.

“What we’re watching going forward is we think there is going to be more volatility in these markets, it’s not going to be the same sort of ‘risk assets always go up over time’ story that maybe happened in the rebound from COVID.

“Now we’re in that rockier period – that’s the post-peak growth, post-peak fed support, fiscal support, all of those areas that are making for a more complicated picture going forward.”

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