While all eyes are still on Turkey, another emerging market is about to show the ugly side of quantitative tightening, and this time things could get really serious.
The world’s second largest economy has been a “success story” for so long that people have forgotten about China’s many vulnerabilities. Or rather, the Chinese communist party has been so good at keeping things under wraps, that few of the country’s weaknesses are known to the outside world.
The headline may be a bad pun, but the warning is serious. Many people believe that the trouble with Turkey’s currency is confined to that country, but that is far from the case. Turkey is just the first country that implemented populist policies when the going was good to now pay for these policies. The markets are about to teach populists a lesson, and Turkey is the first instalment.
When the bank of central banks warns about financial stability, you have to take notice — even if the warning comes in the Bank for International Settlements usually dry, academic style.
The BIS recently published a paper about the effect of prolonged interest rates on financial stability, and it makes worrying reading. (However, as most people are on holidays in August, unless they are reading it on the beach it will largely go unnoticed).
Speeches and releases from various European Central Bank officials don’t make the best summer reading, that’s for sure. But it might be a good idea to go through a couple of recent ones, which give a hint of what the future might bring.
This past week, there has been a frenzy of selling of emerging markets assets. The outflows from both stocks and debt in emerging markets reached their highest level since December 2016.
This amounted to $3.7 billion withdrawn from emerging market equities and bonds, according to data analysed by Bank of America Merrill Lynch. These outflows have helped push our old friend, the Bull/Bear indicator developed by BofA Merrill Lynch, to 4.8 — its lowest level since January 2017.
The year-to-date capital flows seem to show a dramatic change in the way investors perceive risk in the stock markets. Emerging market equities, Japan and the financial sector seem to have turned from risky assets into “safe havens”.
Remember when Donald Trump hinted that he would threaten to restructure the US debt to get better terms on it? His protectionist measures may “help” him to achieve some sort of restructuring, but not in a good way.