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Sancho Panza

It's China Not The Fed Causing The Emerging Markets Sell Off.

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Bloomberg 7/2/14

'China’s policy shifts are a bigger driver of the selloff in emerging markets than the Federal Reserve’s decision to dial back stimulus, according to Goldman Sachs Asset Management. Volatility will rise toward its long-term average and that means an increase in risk premiums, said Philip Moffitt, head of fixed income in Sydney for Asia and the Pacific at Goldman Sachs Asset Management, which had $991 billion of assets under supervision worldwide as of September. The risks for different emerging economies will become more idiosyncratic and Mexico presents a buying opportunity following the rout, he said.

Markets from Turkey to South Africa and Argentina were roiled during the past month as investors sold off emerging-economy currencies, stocks and bonds, prompting emergency measures from governments and central banks. The bout of risk aversion follows the Fed’s decision to scale back asset purchases and China’s pledge to rein in leverage and give market forces a more decisive role in allocating resources.

“The selloff in emerging markets has much more to do with China than with Fed tapering,” Moffitt said yesterday in an interview in Sydney. “China’s such a big source of global demand, in particular for other emerging markets, uncertainty’s going to stay high and risk premiums should be expanding.”

Credit Boom

The worst isn’t over for emerging markets, Mark Mobius, who oversees more than $50 billion in developing nations as an executive chairman at Templeton Emerging Markets Group, said in an interview. Prices can decline further or take time to stabilize, he said.

China’s policy makers have attempted to rein in the unprecedented credit boom they unleashed in 2008-2009 amid the global financial crisis. Money market rates in China have surged, the cost of insuring against credit default by banks has increased and payment difficulties are emerging in the country’s $6 trillion shadow-banking industry.

“They’re looking to create a market that prices credit risk, rather than having prices imposed,” Moffitt said. “In the absence of a strong mechanism for pricing credit risk, there’s likely to be a lot of uncertainty and volatility.”

The world’s second-largest economy is predicted to expand by 7.4 percent this year, the slowest pace since 1990, according to the median estimate in a Bloomberg News survey.

Diverging Outlooks

The slowdown in China comes as the U.S. economy is showing signs of a pickup, allowing the Fed to trim its monthly bond purchases to $65 billion from $85 billion. U.S. growth is expected to accelerate to 2.8 percent in 2014 from 1.9 percent last year, according to a another Bloomberg poll.

Moffitt said investing in Mexico would be his top trade at the moment because the country’s fundamental outlook is strong even though it has been affected by the global selloff.

“There’s been outflow from emerging-market assets and when you get that kind of flow people sell what they can sell, often high-quality assets,” he said. “It will benefit from the strong U.S. growth we’re expecting and there’s the prospect for rate cuts, so Mexico stands out to us on both value and fundamentals.”''

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lol! Blame China.

This is caused by unlimited printy and

Triffin’s Dilemma. Where a

country that prints the world’s

reserve currency has a blank

cheque to create as much debt as

it wants, underwritten by the

rest of the world which in turn

requires the reserve currency to

trade.

The country of the reserve

currency becomes that which is

able to consume the most and so

runs a trade deficit. As the

reserve country gets deeper into

debt and deficit, and inflation

picks up at home, they may

choose to tighten, nt least to

shore up their overextended

banks. This immediately causes a

squeeze in dollars and trade in

the rest of the world. Emerging

markets get hammered.

This financial system has no

solution. Only collapse.

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Spot on.

China's monetary and forex policy is under their own control, as it is for smaller EMs.

Nothing to do with the FED. Their problems are entirely of their own making.

Won't stop the usual suspects blaming the FED of course. That's what they do.

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Spot on.

China's monetary and forex policy is under their own control, as it is for smaller EMs.

Nothing to do with the FED. Their problems are entirely of their own making.

Won't stop the usual suspects blaming the FED of course. That's what they do.

+1

Gotta be China. The Fed's still printing like billy-o.

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Nevertheless a lot of Chinese demand is from the US in terms of manufactured goods. This is dropping still, China has enlarged internal spending to compensate. But approaching debt saturation.

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“They’re looking to create a market that prices credit risk, rather than having prices imposed,” Moffitt said. “In the absence of a strong mechanism for pricing credit risk, there’s likely to be a lot of uncertainty and volatility.”

Interesting idea this- credit that actually carries a risk- maybe this is something that the free market capitalist countries could try?

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Bloomberg 7/2/14

'China’s policy shifts are a bigger driver of the selloff in emerging markets than the Federal Reserve’s decision to dial back stimulus, according to Goldman Sachs Asset Management. Volatility will rise toward its long-term average and that means an increase in risk premiums, said Philip Moffitt, head of fixed income in Sydney for Asia and the Pacific at Goldman Sachs Asset Management, which had $991 billion of assets under supervision worldwide as of September. The risks for different emerging economies will become more idiosyncratic and Mexico presents a buying opportunity following the rout, he said.

Markets from Turkey to South Africa and Argentina were roiled during the past month as investors sold off emerging-economy currencies, stocks and bonds, prompting emergency measures from governments and central banks. The bout of risk aversion follows the Fed’s decision to scale back asset purchases and China’s pledge to rein in leverage and give market forces a more decisive role in allocating resources.

“The selloff in emerging markets has much more to do with China than with Fed tapering,” Moffitt said yesterday in an interview in Sydney. “China’s such a big source of global demand, in particular for other emerging markets, uncertainty’s going to stay high and risk premiums should be expanding.”

Credit Boom

The worst isn’t over for emerging markets, Mark Mobius, who oversees more than $50 billion in developing nations as an executive chairman at Templeton Emerging Markets Group, said in an interview. Prices can decline further or take time to stabilize, he said.

China’s policy makers have attempted to rein in the unprecedented credit boom they unleashed in 2008-2009 amid the global financial crisis. Money market rates in China have surged, the cost of insuring against credit default by banks has increased and payment difficulties are emerging in the country’s $6 trillion shadow-banking industry.

“They’re looking to create a market that prices credit risk, rather than having prices imposed,” Moffitt said. “In the absence of a strong mechanism for pricing credit risk, there’s likely to be a lot of uncertainty and volatility.”

The world’s second-largest economy is predicted to expand by 7.4 percent this year, the slowest pace since 1990, according to the median estimate in a Bloomberg News survey.

Diverging Outlooks

The slowdown in China comes as the U.S. economy is showing signs of a pickup, allowing the Fed to trim its monthly bond purchases to $65 billion from $85 billion. U.S. growth is expected to accelerate to 2.8 percent in 2014 from 1.9 percent last year, according to a another Bloomberg poll.

Moffitt said investing in Mexico would be his top trade at the moment because the country’s fundamental outlook is strong even though it has been affected by the global selloff.

“There’s been outflow from emerging-market assets and when you get that kind of flow people sell what they can sell, often high-quality assets,” he said. “It will benefit from the strong U.S. growth we’re expecting and there’s the prospect for rate cuts, so Mexico stands out to us on both value and fundamentals.”''

goldman sachs is finished.

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http://soberlook.com/2014/02/watching-china-taper.html

Watching the 'China taper'

: -
"Emerging markets should be much more concerned about the 'China taper' than the Fed taper
" - Crossborder Capital Managing Director Mike Howell.

Indeed, while the rate of US taper is modest and reasonably well defined, signs point to slower economic expansion in China. And even in the near-term there is little visibility on that country's growth. The January HSBC services PMI print this morning was quite weak. One of the explanations seems to be that services have slowed due to Beijing forcing government officials to go easy on the extravagant "entertainment" that has become so prevalent in recent years (see post). Once that is dealt with things should improve? Perhaps.

Hongbin Qu/HSBC (published by Markit): - The slower expansion of services activities in January reflected soft manufacturing growth and the impact of Beijing's latest measures to curb official extravagance. As business sentiment remains stable, we expect services growth to bounce back a little in the coming months. Yet a meaningful improvement relies on stronger growth of manufacturing sectors and the implementation of reforms to boost service sectors.

China+service+PMI.jpg Source: Investing.com

Other measures from China are consistent with slower growth as well.

: - A similar services PMI released by the China's statistics authority earlier this week showed growth in the sector sagged to a five-year trough in January as business confidence retreated to four-year lows.
Two separate PMIs for China's factories also showed manufacturing growth slipping to six-month lows in January.
Analysts polled by Reuters believe China's economy will grow 7.4 percent this year, far ahead of other major economies but still its worst performance in 24 years.

The trajectory of emerging as well as many developed economies going forward will depend on whether we see an uptick in China's economic activity after the holidays. For now the global equity markets remain skeptical.

Equity+markets+performance.PNG Source: Ycharts

  • ^DJWO - Dow Jones global equity index
  • IEMG - Core emerging markets
  • FXI - China's large cap shares'

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