Investors beating a retreat from emerging markets tested the resolve of central banks fighting to protect their economies from sliding exchange rates.
The Turkish lira swung between gains and losses and South Africa’s rand touched its lowest level in more than five years against the dollar after policy makers raised interest rates higher than predicted by economists.
Russia’s ruble tumbled to a record, Brazil’s real slid to the weakest since August and Hungary’s forint tumbled the most in more than 18 months.
The selloffs underscored the exodus from assets of developing nations as the Federal Reserve tightens the monetary spigot.
The U.S. central bank tapered its quantitative easing today as it announced plans to trim monthly bond buying by $10 billion to $65 billion, deepening investor unease over slowing growth and a dependence on external capital flows in emerging markets.
“Whenever the Federal Reserve tweaks its interest-rate policy, it ends up blowing up some emerging market,” said Ben Deschaine, head of liquid alternatives at Boston-based Balter Capital Management, LLC, which farms out money to hedge funds.
“Beginning in 2007 we saw money flowing into emerging markets, but after three years of massive underperformance the money is now going the other way. At some point the markets will reach a level that’s attractive, but we aren’t there yet.”
Turkey and South Africa followed counterparts from Brazil to India in tightening monetary policy after the stocks of emerging markets suffered their worst start to a year in five.
Once the locomotives that drove the world from its 2009 recession, investors are now reviewing the returns such economies can provide as their economies weaken and the Fed curbs the stimulus that pushed capital into their borders.
Turkey Reversal
Today’s wild swings followed initial gains after Turkey’s central bank met in an extraordinary late-night meeting. The policy makers more than doubled the one-week repurchase rate to 10 percent from 4.5 percent in a bid to halt a currency run partly propelled by domestic political upheaval.
Prime Minister Recep Tayyip Erdogan, who said yesterday he’s always opposed higher rates, is caught in a graft scandal that has ensnared several ministers.
While the Turkish lira initially rallied as much as 4 percent against the dollar, it fell as much as 3 percent and was down 0.1 percent at 2.2544 per dollar as of 3:01 p.m. in New York.
“It’s good that Turkey is turning more orthodox, but they are hiking a lot, which means the impact on the economy and on the banks could be a lot,” said Pierre-Yves Bareau, the global head of emerging-market debt at JPMorgan Asset Management Ltd., which oversees $1.5 trillion in assets.
“They are trying to do things, but I don’t think it’s sufficient to be optimistic.”
South Africa
Hours later, the South African Reserve Bank unexpectedly raised its benchmark to 5.5 percent from 5 percent in the first increase since June 2008.
None (SARPRT) of the 25 economists surveyed last week predicted the change, overlooking officials concern that a weaker rand and faster inflation had replaced slower global demand and mining strikes as their chief concern.
“The bottom line is they should have started hiking rates earlier or should never have allowed rates to become as they are right now,” said Jana le Roux, a Johannesburg-based analyst at ETM Analytics.
The rand fell 2 percent 11.2656 after reaching as low as 11.3803 per dollar, the weakest since October 2008. The rot spread as Russia’s ruble touched an all-time low of 41.0056 against Bank Rossii’s target dollar-euro basket.
Brazil’s real reached a five-month low of 2.4505 per dollar, even as the central bank has raised benchmark borrowing costs 3.25 percentage points since April, the most in the world. The forint fell 1.4 percent against the euro.
Pushing Policy Makers
“Capital may be pulling out of assets with low risk premium in light of today’s Fed meeting,” Pal Saaghy, a Budapest-based currency trader at broker Equilor Befektetesi Zrt., said by phone today. The Turkish rate decision “just shows that other countries can get into the same situation,” Saaghy said.
“The market may have realized that they can force central banks into raising rates.” India’s rupee nevertheless completed its biggest two-day gain in more than two months a day after the Reserve Bank of India boosted its key rate to 8 percent from 7.75 percent.
“Raising rates during a period of obvious economic deceleration following massive build-ups of domestic private sector credit is rarely a recipe for attractive investment markets,” Michael Shaoul, the New York-based chairman and chief executive officer of Marketfield Asset Management LLC, which oversees $21 billion, wrote in a note to clients today.
A Bloomberg index of the 20 most-traded emerging-market currencies fell 2 percent this month, extending last year’s 7 percent slump, the biggest since 2008.
Stocks Decline
The MSCI developing-nation gauge has now fallen 6.6 percent in January, the third monthly drop, heading for the longest losing streak since a similar stretch ended May 2012.
More than $1.1 trillion has been erased from the value of emerging-market equities since the Fed signaled in May that it could start scaling back bond purchases that boosted demand for higher-yielding assets.
“It is possible that investors fear that the EM central banks have fired their lost shot and will be unable to follow through with more tightening or that economies, politics are too weak to support rate hikes,” said Steven Englander, the head of currency trading for major industrialized nations at Citigroup Inc., the world’s second-biggest currency trader.
Eyes now turn to the Fed, which announced in Washington today it will lop another $10 billion from its monthly bond buying to $65 billion.
The central bank will continue to cut purchases by $10 billion at each of the next six FOMC meetings, with the program ending no later than December, according to Bloomberg’s Jan. 10 survey of economists.
Bill Gross, chief investment officer at Pacific Investment Management Co., recommended avoiding the run-up in risk by buying U.S. Treasuries. “Turkey and South Africa flunk currency tests -- don’t wait around to see who’s next,” he said on Twitter.
bloomberg.com
The Turkish lira swung between gains and losses and South Africa’s rand touched its lowest level in more than five years against the dollar after policy makers raised interest rates higher than predicted by economists.
Russia’s ruble tumbled to a record, Brazil’s real slid to the weakest since August and Hungary’s forint tumbled the most in more than 18 months.
The selloffs underscored the exodus from assets of developing nations as the Federal Reserve tightens the monetary spigot.
The U.S. central bank tapered its quantitative easing today as it announced plans to trim monthly bond buying by $10 billion to $65 billion, deepening investor unease over slowing growth and a dependence on external capital flows in emerging markets.
“Whenever the Federal Reserve tweaks its interest-rate policy, it ends up blowing up some emerging market,” said Ben Deschaine, head of liquid alternatives at Boston-based Balter Capital Management, LLC, which farms out money to hedge funds.
“Beginning in 2007 we saw money flowing into emerging markets, but after three years of massive underperformance the money is now going the other way. At some point the markets will reach a level that’s attractive, but we aren’t there yet.”
Turkey and South Africa followed counterparts from Brazil to India in tightening monetary policy after the stocks of emerging markets suffered their worst start to a year in five.
Once the locomotives that drove the world from its 2009 recession, investors are now reviewing the returns such economies can provide as their economies weaken and the Fed curbs the stimulus that pushed capital into their borders.
Turkey Reversal
Today’s wild swings followed initial gains after Turkey’s central bank met in an extraordinary late-night meeting. The policy makers more than doubled the one-week repurchase rate to 10 percent from 4.5 percent in a bid to halt a currency run partly propelled by domestic political upheaval.
Prime Minister Recep Tayyip Erdogan, who said yesterday he’s always opposed higher rates, is caught in a graft scandal that has ensnared several ministers.
While the Turkish lira initially rallied as much as 4 percent against the dollar, it fell as much as 3 percent and was down 0.1 percent at 2.2544 per dollar as of 3:01 p.m. in New York.
“It’s good that Turkey is turning more orthodox, but they are hiking a lot, which means the impact on the economy and on the banks could be a lot,” said Pierre-Yves Bareau, the global head of emerging-market debt at JPMorgan Asset Management Ltd., which oversees $1.5 trillion in assets.
“They are trying to do things, but I don’t think it’s sufficient to be optimistic.”
South Africa
Hours later, the South African Reserve Bank unexpectedly raised its benchmark to 5.5 percent from 5 percent in the first increase since June 2008.
None (SARPRT) of the 25 economists surveyed last week predicted the change, overlooking officials concern that a weaker rand and faster inflation had replaced slower global demand and mining strikes as their chief concern.
“The bottom line is they should have started hiking rates earlier or should never have allowed rates to become as they are right now,” said Jana le Roux, a Johannesburg-based analyst at ETM Analytics.
The rand fell 2 percent 11.2656 after reaching as low as 11.3803 per dollar, the weakest since October 2008. The rot spread as Russia’s ruble touched an all-time low of 41.0056 against Bank Rossii’s target dollar-euro basket.
Brazil’s real reached a five-month low of 2.4505 per dollar, even as the central bank has raised benchmark borrowing costs 3.25 percentage points since April, the most in the world. The forint fell 1.4 percent against the euro.
Pushing Policy Makers
“Capital may be pulling out of assets with low risk premium in light of today’s Fed meeting,” Pal Saaghy, a Budapest-based currency trader at broker Equilor Befektetesi Zrt., said by phone today. The Turkish rate decision “just shows that other countries can get into the same situation,” Saaghy said.
“The market may have realized that they can force central banks into raising rates.” India’s rupee nevertheless completed its biggest two-day gain in more than two months a day after the Reserve Bank of India boosted its key rate to 8 percent from 7.75 percent.
“Raising rates during a period of obvious economic deceleration following massive build-ups of domestic private sector credit is rarely a recipe for attractive investment markets,” Michael Shaoul, the New York-based chairman and chief executive officer of Marketfield Asset Management LLC, which oversees $21 billion, wrote in a note to clients today.
A Bloomberg index of the 20 most-traded emerging-market currencies fell 2 percent this month, extending last year’s 7 percent slump, the biggest since 2008.
Stocks Decline
The MSCI developing-nation gauge has now fallen 6.6 percent in January, the third monthly drop, heading for the longest losing streak since a similar stretch ended May 2012.
More than $1.1 trillion has been erased from the value of emerging-market equities since the Fed signaled in May that it could start scaling back bond purchases that boosted demand for higher-yielding assets.
“It is possible that investors fear that the EM central banks have fired their lost shot and will be unable to follow through with more tightening or that economies, politics are too weak to support rate hikes,” said Steven Englander, the head of currency trading for major industrialized nations at Citigroup Inc., the world’s second-biggest currency trader.
Eyes now turn to the Fed, which announced in Washington today it will lop another $10 billion from its monthly bond buying to $65 billion.
The central bank will continue to cut purchases by $10 billion at each of the next six FOMC meetings, with the program ending no later than December, according to Bloomberg’s Jan. 10 survey of economists.
Bill Gross, chief investment officer at Pacific Investment Management Co., recommended avoiding the run-up in risk by buying U.S. Treasuries. “Turkey and South Africa flunk currency tests -- don’t wait around to see who’s next,” he said on Twitter.
bloomberg.com
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