Emerging Markets Suffer as Bond Yields Rise

The minutes for the Federal Open Market Committee are due out on Wednesday, and with them comes expectations that stimulus is going to be scaled back imminently. This has had the effect of sending German and US bond yields to highs of several months, two of the strongest performers in the climb out of the global economic downturn. The knock-on result is that emerging markets such as India have been hit hard. The Rupee is at record lows.

MARKETS WAIT ON FOMC MINUTES

Tapering is all but certain, but much of the debate has been over exactly when it will occur. Details have been generally vague, with some initial indications suggesting that it wouldn’t happen until the start of 2014. This is no longer the popular opinion, and most economists believe that moderation of quantitative easing could happen as early as next month.

The FOMC meeting minutes should make things clearer in terms of its own bond-buying scheme, and there should also be some sentiment data that outlines the Eurozone’s current fortunes, as it emerges from recession.

The dollar has not tracked the rise in US yields, just as it is not tracking the exposed stock market.
Germany’s 10 year yields have seen a 3.6 point increase to 1.91 percent, and are hovering around the highest level since March last year. It’s looking increasingly likely that they’ll break past 2 percent soon, which is an important level.

The 10 year yields for the US are at around 2.87 percent, their highest in two years.

Shares in Europe have started down week beginning 19th August, as the announcement that the Eurozone exited recession prompted some investors to cash in. FTSE saw a 0.3 percent drop, and both the DAX and CAC 40 saw a 0.6 percent decline.

DEVELOPING NATIONS HIT

With rising yields, emerging economies struggle to fund deficits in their current accounts, as they are inextricably tied to the dollar and the US economy as a whole.

The Rupee hit a new low of 62.50 to the dollar, some 0.47 lower than the previous low. If that wasn’t tough enough, there was also a 1.4 percent loss from India’s shares market. This comes after Friday wiped off 4 percent.

The Indian Central Bank did attempt to curb the decline by placing restrictions upon the volume of currencies that can be sent offshore by individuals and businesses, but this failed. The restrictions simply had the effect of scaring off foreign investment, encouraging the fear that there could be even stricter controls on capital.

India wasn’t the only troubled country. The Rupiah, used in Indonesia, hit a four year low, and poor data has shown itself in the ex-Japan MSCI Asia-Pacific index, with a 0.5 percent drop.The region is looking to Chinese data due out this week, which should show some stability; an attraction for Asian investors.
Again, Japan is the exception, with the Nikkei boasting a 0.8 percent rise, despite a near-record trade deficit, down to the rate of import growth outstripping export growth.

DOLLAR CALM

The US Dollar hardly moved against the euro over the weekend, with a slight drop against the yen. There’s been a slow decline for the currency recently, as tapering fears price themselves into the markets. Alpari report that there appears to be very little direction in the markets however, and that things are likely to become clearer on Wednesday.