We’ve been warning about a perfect storm for an EM pullback for months.
There are just too many goddamn headwinds here.
You’ve got geopolitical risk rearing its ugly head. And then there’s DM central banks that are hell-bent on rolling back stimulus and thereby lifting DM yields and reducing the central bank liquidity impulse that’s kept the carry party going.
That’s a recipe for disaster – especially for a space that’s priced to perfection.
Ironically, one of the only things that’s kept the wheels from falling off (well, besides the coordinated liquidity impulse spearheaded by the ECB and the BoJ) is an inept Trump, whose inability to advance his growth-friendly agenda has kept a lid on dollar strength.
Well as we noted this morning and as outlined in more detail here, the tide is starting to turn and it would certainly appear that between geopolitical turmoil and an ECB that looks like it’s prepared to upset the proverbial applecart, the EM party may soon come to a rather unceremonious end.
As Bloomberg notes, the “ECB minutes show officials discussed removing the biases in their policy communication for interest rates and asset purchases,” and that “added to broad EMFX negative scenario tied to upcoming reduction of global liquidity.”
Have a look at what the JPMorgan EM FX index has done this week:
“Emerging” problem or blip on the radar screen?