Wednesday, February 12, 2014

Emerging Markets Might Not Submerge (excerpt)

The latest mini-correction was triggered by anxiety over an emerging markets crisis, which some feared had the potential to turn into a global contagion. I argued that the crisis would be contained to the Fragile Five, and wouldn’t morph into another Lehman-style financial calamity.

Interestingly, even Nouriel Roubini, who had been a perma-bear during the first four years of the current bull market, was relatively relaxed about the current crisis in a 1/31 article, though it was titled, “The Trouble with Emerging Markets.” He started his analysis ominously, warning: “This mini perfect storm in emerging markets was soon transmitted, via international investors’ risk aversion, to advanced economies’ stock markets. But the immediate trigger for these pressures should not be confused with their deeper causes: Many emerging markets are in real trouble.”

Near the end of his article, Roubini turned more upbeat for some of the same reasons that we didn’t get panicky about the current crisis: “Nonetheless, the threat of a full-fledged currency, sovereign-debt, and banking crisis remains low, even in the Fragile Five, for several reasons. All have flexible exchange rates, a large war chest of reserves to shield against a run on their currencies and banks, and fewer currency mismatches (for example, heavy foreign-currency borrowing to finance investment in local-currency assets). Many also have sounder banking systems, while their public and private debt ratios, though rising, are still low, with little risk of insolvency.”

Last Wednesday, I offered a “too-important-to-implode” analysis of the EM crisis: “Obviously, a widespread emerging markets crisis would be a calamity for the global economy. However, it is precisely because EMs have become so much more important to the global economy that such a crisis might be less rather than more likely. Capital flows aren’t likely to dry up to companies operating in EMs that are doing more and more business in those economies and the rest of the world.”

The Emerging Markets MSCI (in dollars) has been highly correlated with both the CRB raw industrials spot price index and the price of a barrel of Brent crude oil. While the EM MSCI is down 5.0% ytd, it is encouraging to see that commodity prices remain surprisingly stable. That suggests that the global economy is carrying on.

Today's Morning Briefing: Another Relief Rally. (1) What a relief! (2) Breaking 50-dma isn’t so bad. (3) Big correction in BBR sentiment indicator. (4) Keeping calm and carrying on despite half-a-dozen anxiety-provoking uncertainties. (5) Even Roubini isn’t that bearish on EM crisis. (6) EMs: Too important to implode? (7) US consumer income measures at record highs. (8) The Fairy Godmother of the bull market speaks. (9) Raising the debt ceiling without drama. (10) German court passes the case. (11) Europe still muddling. (More for subscribers.)

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