Emerging markets are hit hard by rising market volatility
The important bit is the following ...
"Volatility measures around the world have spiked sharply higher in recent weeks as investors fretted about the chances for higher interest rates and the potential economic impact. On Mondays the VIX, the US volatility index – sometimes known as the “fear gauge” – reached a two-year high of 19.62, up 10 per cent on the day. Germany’s equivalent measure jumped more than 12 per cent.
Steadier assets such as government bonds rallied as investors sought safe havens for their cash. The rush forced the yield on the 10-year US Treasury note to dip below 5 per cent, down sharply from a four-year peak above 5.2 per cent just a week earlier.
“Although the current environment is nowhere near as serious as the Russian crisis Treasury traders need to look no further than to Latin American bond markets,” said Brian Robinson, strategist at 4Cast consultancy.
Emerging market bonds fell steeply as investors continued to unwind popular “carry trades”, where they had borrowed at low rates to invest the proceeds in higher-yielding instruments.
The spread, or risk premium investors charge above Treasury rates to hold emerging market bonds, widened to 2.23 percentage points, its highest since January according to JPMorgan’s EMBI index.
But market observers remained relatively calm.
“This is a healthy correction,” said David Spegal, emerging markets strategist at ING. “The markets were overvalued and there was a lot of speculation. Right now we’re experiencing a readjustment of risk.”
Regulators are watching the credit markets particularly carefully this week to assess whether the turmoil seen in equities and commodities will spill over to corporate bonds and related derivatives. If equity market unease starts to infect the credit world, this could indicate that there is now a significant shift in investor mood under way.
There were signs that investors are starting to become more nervous and the cost of credit default swaps – insurance-like contracts that pay out of a company defaults – rose. “"
Brad's perpspective is important as he points to a structural change in the way emerging markets handle capital inflows.
"How have emerging economies changed since 1997, the last time money flowed their way in a big way? Fundamentally, by saving rather than spending the commodity windfall, and by saving rather than spending the huge wave of capital that flooded emerging economies the past few years? Obviously, there are exceptions – Eastern Europe, Turkey, India (now) and with oil prices high, Thailand and Korea -- all run current account deficits. But in aggregate, the emerging world has a big current account surplus despite attracting (til the last two weeks) big capital inflows."