Tag Archives: markets
Emerging Markets Have Farther To Fall
Kenneth Rapoza , Contributor INVESTING | 8/20/2013 Emerging Markets Have Farther To Fall Emerging market investors worried about this guy: Ben Bernanke and the Federal Reserve’s quantitative easing policy. The market will get a better sense of so-called “tapering” of QE in the FOMC meeting minutes due out on Wednesday. Barclays Capital expects more pain for emerging market equity and bonds, in the meantime. (Image credit: Getty Images via @daylife) The emerging markets have farther to fall and they can lay the blame on Ben Bernanke and the Federal Reserve for their sad-sack performance over the last several days. On Tuesday, the iShares MSCI Emerging Markets Index (EEM) was trading slightly lower following Monday’s 1.86% drop. Will investors buy on the lows? Of course they will. But is this a market ripe for deeper corrections? It sure is, says Barclays BCS +0.34% Capital analyst Koon Chow in London. Risky assets continue to be weighed down by rising rates in the U.S. Ten year Treasury bonds are now yielding 2.83%. In London trading hours this morning, European equities followed the downbeat tone in Asian markets. Meanwhile, high yielding currencies like the Brazilian real are bearing the brunt in the forex markets. And it’s not over yet. This underperformance is likely to continue as the starting point of Fed tapering nears, said Chow in his daily note to clients today. Right now, all eyes are on the Fed Open Market Committee Meeting (FOMC) minutes coming out on Wednesday. The risk associated with the FOMC minutes is whether the Fed has begun discussing a possible change in its threshold rate for unemployment as a means of continuing its QE program. Remember, Bernanke said that he would not step on the break of quantitative easing until unemployment levels were comfortably below 7%, or at the very least, trending downward. Unemployment has been trending downward, but at a slower pace. Any discussion of a move away from waiting for lower unemployment will likely to be viewed as a dovish surprise by the market and may lead to a near-term rally for global bonds. Equities would also bounce. The noticeable lack of a broad dollar rally, despite the sharp moves against high yield currencies, suggests that the market may already be positioning for such an announcement. One of the problems right now with emerging market investing is fund managers are allocating out of them faster than anyone expected. The positioning in emerging markets is still problematic, said Chow, although arguably slightly less negative in equities than in fixed income where global institutional and retail positions are still large. This would suggest that there can be some asymmetry in emerging markets in the months ahead, with greater risks of disruptive moves in fixed income than in equities. Fund managers do not want to be caught holding the same positions, with the same weighting post-QE as they were during QE. This is driving the bulk of the moves in the market these days. Meanwhile, the investment patterns in developed markets seems different. While in emerging, investors have had asset allocation shifts that look more like “risk reduction”, developed market positioning is suggestive of only the early stages of the great rotation out of fixed income to equities, Barclays’ Chow said. The stock of cumulative retail inflows (as opposed to institutional) to developed market equities since early 2009 is actually negative. But institutional investors have not seen such a radical exit from their emerging equity positions. Since the financial crisis, the cumulative position of retail investment into developed market equity mutual funds is still negative ($239 billion less), but it has been offset by large institutional flow into the market ($364 billion), according to Cambridge, Mass. based fund trackers EPFR Global. EFPR Global data also shows that investment outflow from emerging markets is suggestive of broader risk reduction. Investors in retail funds have nearly completed their exit from emerging. They have also reduced their bond holdings by about 25% from multi-year highs in May. The flows from institutional funds, by contrast, have been “stickier”, said Chow, and sold in moderate amounts of both equities and debt since late May. “Although the institutional investors’ decisions should be more long-term focused and therefore naturally less likely to exit, the fact that they have not reduced their positions significantly is an unhelpful positioning technical and they may need to see a further drop in prices to buy,” Chow said. He expects more volatility, and downside risks. Technically speaking, emerging equity looks better than bonds given the considerably more advanced overall exit by both retail and institutional at this point, Chow said. A look at the assets wealthy investors assumed would return the most for their portfolios this year. Continue reading
EM Storms Could Spread To Europe
http://www.ft.com/cms/s/0/03acf9f0-098b-11e3-8b32-00144feabdc0.html#ixzz2cXAczb6b By Ralph Atkins in London Periphery eurozone bond markets could be next in line for sell-off At the start of this year, emerging market turmoil was on few investors’ worry lists. Top preoccupations were US fiscal woes, the rumbling eurozone debt crisis and a possible “hard” landing for China’s economy. Nobody really considered what would happen if all those threats did not materialise. The financial storms hitting India and other developing economies this week are the answer. With the US economy having successfully avoided possible global upsets and growing steadily, the US Federal Reserve wants to wind down its asset purchases, or “quantitative easing”, from as early as next month. As a result bond prices have fallen, and yields risen correspondingly, in developed markets – and the strong flows of capital into emerging markets that had been attracted by higher yields there have gone firmly into reverse. Worst hit have been countries most reliant on capital inflows – those with gaping current account deficits to finance. In India, where the deficit exceeded 5 per cent of gross domestic product last year, the rupee has tumbled to a record low against the dollar. Equity prices have fallen precipitously, while 10-year bond yields have approached 10 per cent, the highest for five years. The good news is that this has not yet spun into a full-blown emerging market crisis, and the Fed can control the pace at which it “tapers” asset purchases. European shares are benefiting as an alternative contrarian trade for investors looking for underrated assets. The bad news is that we are still at the start of the process of exiting global QE and the effects will spread – including, perhaps, to weaker European economies. Much of what is happening in emerging markets is the result of national factors – India’s troubles have been exacerbated by seemingly cack-handed political decisions. It is also true that global investors fell out of love with emerging market equities long before Ben Bernanke, Fed chairman, first hinted at tapering on May 22. Thus the extent to which tapering is causing the emerging market tensions is disputed. But it seems obvious that tapering talk has at least exacerbated the sell-off. Outflows from Bric (Brazil, Russia, India and China) bond funds have been equivalent to almost a third of assets under management since May 22, according to EPFR, a funds data provider. That compares with just 4 per cent from the start of the year until Mr Bernanke spoke. Moreover, there has been a clear relationship between the size of current account deficits and the extent to which countries have been hit by the financial turmoil – strengthening the argument that it is reversed QE flows that are the main culprit. Indonesia, where the current account also deteriorated sharply last year, has seen some of the sharpest equity price falls. South Africa, Turkey and Brazil have, like India, seen steep rises in bond yields and tumbling dollar exchange rates. Ominously, the lesson of economic history is that when capital inflows go into reverse, the turnround is often abrupt and painful. Nor are surplus countries immune. When emerging market fund managers have to finance sudden large outflows they are forced to sell higher-quality, more liquid assets – and the effects spread. For Europeans, this week’s events are eerily reminiscent of the damage wreaked on the Baltic states that were running massive current account deficits when the global financial crisis erupted in 2007. Eurozone bond yields have remained steady for the (not entirely positive) reason that fickle foreign investors have already fled the region’s weakest markets. For a while, weaker members of the eurozone were protected by the currency union. But then the eurozone itself was almost torn apart as strong capital flows from the continent’s north to the southern periphery went into reverse. Fixed exchange rate regimes sometimes lull investors into a false sense of security by delaying an inevitable correction. This week’s emerging market turmoil will encourage the shift in investor sentiment back towards developed economies, especially those returning to internally driven, self-sustaining growth. The risk for Europe, however, is that periphery eurozone bond markets could be next in line for a sell-off. If German 10-year Bund yields are rising – they have this week exceeded 1.9 per cent, compared with less than 1.2 per cent in early May – yields below 4.5 per cent on Italian and Spanish equivalents look less compelling. For now, eurozone bond yields have remained steady for the (not entirely positive) reason that fickle foreign investors have already fled the region’s weakest markets. But we are at the start of a long process in which US monetary policy will evolve – with effects nobody can predict with confidence. Continue reading
EPA Should Do More to Reduce Competition Between Food and Fuel Crops
WASHINGTON (August 6, 2013)—The Environmental Protection Agency’s (EPA) announcement today that it would allow food-based biofuels to make up the shortfall in cellulosic ethanol production this year was a missed opportunity to reduce pressure on food supplies and curb the clearing of forests for farmland, the Union of Concerned Scientists (UCS) said today. However, UCS experts are encouraged by EPA’s statement that it plans to reduce food based biofuel volumes in 2014 and urges the agency to act on this commitment as quickly as possible. The science advocacy group submitted comments to EPA earlier this year urging the agency to exercise the flexibility provided by Congress in implementing the Renewable Fuel Standard (RFS) to reduce competition between food and fuel while continuing to encourage the commercialization of the non-food cellulosic biofuel industry. The RFS was designed to promote renewable fuels that do not compete with food supplies. Unfortunately, EPA’s decision calls for so-called “advanced” food-based biofuels such as biodiesel and sugarcane ethanol to make up for a production shortfall in cleaner cellulosic biofuels this year. But UCS is optimistic the agency will correct the problem for 2014. In the announcement today, EPA stated its plans to reduce the advanced biofuel and total renewable fuel mandates in 2014 to reflect the slower-than-expected pace of cellulosic biofuel commercialization. “We have a responsibility to ensure we move towards cleaner fuels that won’t strain food supplies, accelerate agricultural expansion and drive deforestation,” said Jeremy Martin, a senior scientist with UCS’s Clean Vehicles Program. “The agency should revisit the overall mandate structure and set reasonable targets for the duration of the program — not just one year’s worth — to ensure we are meeting that responsibility.” Markets for corn, sugar and vegetable oil are tight and thus any expansion of mandates for food-based biofuels will put pressure on food prices, forcing the expansion of agricultural land into forested areas. “EPA has the authority to do what is right and prevent accelerating the expansion of food based biofuels such as sugarcane ethanol and biodiesel,” Martin said. “Cellulosic fuels still offer the best bet for replacing large amounts of oil without disrupting our food supplies.” Today EPA also extended the deadline to comply with the 2013 standards by four months, to June 30, 2014. When created in 2007, the RFS contained a 2013 goal of 1 billion gallons of cellulosic ethanol. While the EPA’s decision to reduce the mandate reflects the state of current production capacity, the industry is scaling up rapidly and will continue to grow in the years to come. Ineos, for example, recently began commercial-scale production at a refinery that is turning yard and vegetative waste into fuel. Along with vehicle efficiency and other technologies, cellulosic fuels can help the country cut its projected oil use in half over the next 20 years. UCS research suggests there is enough non-food material in the United States, including wastes and fast-growing grasses, to meet the total 36 billion gallon biofuel target under the RFS. While progress has been slower than originally hoped in 2007, UCS believes the RFS is still moving production in the right direction. But to make the RFS work, EPA needs to update their analysis and targets. Martin has written about the critical decisions facing EPA over the future of biofuels on UCS’s blog, the Equation. He has also testified on biofuels policy at two recent congressional hearings. Continue reading
