At this point, the list of reasons why anything with an EM prefix is due for a correction is about a mile long.
The idea that EM equities, credit, and FX can continue to outperform given i) the scope and duration of the rally, ii) a Fed that’s looking to hike (some more), iii) a commodities complex that looks shaky, and iv) a Chinese economy that seems like it really wants to roll over, seems so incredibly far-fetched that I struggle to see how it can possibly be justified even considering the fact that “may the carry be with you” is the prevailing market narrative.
Nevertheless, here we are and the numbers are the numbers. Given the fact that this is an exceedingly important subject and one that’s likely to get a whole helluva lot of attention if/when EM finally does take a dive, I thought the following brief color from Bloomberg’s Cameron Crise was useful or, if it’s not useful, it’s at least amusing for the “Fyre Festival” reference…
For better or for worse we live in an era of propaganda and political theater, and the messaging between East and West came into sharp contrast over the weekend. China’s Belt and Road Forum was a sort of EM-palooza, with an upbeat message of growth and investment. The G-7 finance minsters’ meeting, on the other hand, was more of a Fyre Festival of global economic hegemons, whose flaccid message was “we favor free trade, except when we don’t.”
- With signaling like this, is it any wonder that EM enjoys such wide favor at the moment? The anticipated correction has yet to materialize; indeed, my “USD/EM” screen is a sea of red as EMFX roars higher. That’s not what you’d ordinarily expect during a Fed tightening cycle, but then again this is no ordinary cycle, is it?
- I’ll be using USD/KRW as a near-term tell for EMFX and equity markets. Over the past couple of years, ~1,100 has been very good support for the pair, possibly as a result of “smoothing” by the BOK. It’s still a couple of percent away, but at the rate we’re going it might not take long to get there.
- Discipline dictates not pre-empting technical breaks, so as long as 1,100 holds I’ll think of it as another argument that relatively near-term risks are tilted toward an EM correction. I can only hope that that view doesn’t prove as underwhelming as the Fyre Festival.