Tags: china | g7 | trade | investors | economy

Emerging Markets Plunge Amid Dollar-Funding Turmoil

Emerging Markets Plunge Amid Dollar-Funding Turmoil
(Mateusz Zogala/Dreamstime)

By
Monday, 04 June 2018 07:49 AM Current | Bio | Archive

Emerging Markets

Emerging markets have witnessed a sharp reversal of foreign capital flows over the past six weeks, often exceeding $5 billion a week. As a result, emerging market bonds and currencies have fallen in value.

All this has in part been caused by the Fed’s long-awaited moves to trim its balance sheet and a substantial increase in issuing U.S. Treasuries to pay for the tax cuts.

As a result of all this, dollar funding of emerging market economies has been in turmoil.

On the subject, the governor of the Reserve Bank of India gave some interesting comments in the Financial Times, saying that given the rapid rise in the size of the U.S. deficit, the Fed must respond by slowing plans to shrink its balance sheet. If it does not, the new issuance of Treasuries will absorb such a large share of dollar liquidity that a crisis in the rest of the dollar bond markets is inevitable.

There is however an option available to the Fed to help in some way emerging economies and that does not require it to change the overall policy direction. It can simply recalibrate its normalization plan, adjusting for the impact of the deficit.

G7 meeting

The G7 Finance Ministers’ meeting in the Canadian mountain resort town of Whistler, British Columbia concluded over the weekend and was described as being the “G6 plus one.” The plus one in this instance being the United States.

French Finance Minister Bruno Le Maire told Canadian reporters that a clear message was delivered to Mr. Mnuchin during the Whistler talks. “On trade this is a G6 plus one,” he said. “We have been attacked by those tariffs. We do not have any other choice but to respond … Friends should speak in a very clear manner to the United States. That is exactly what we did this morning with the Secretary of the Treasury, Steven Mnuchin, and I hope that it will be helpful to have a better G7 at the level of the heads of state next week.”

From his side, Treasury Secretary Mnuchin told reporters that he was not part of the six-country consensus on trade and said Trump was focused on “rebalancing our trade relationships.” Mnuchin rejected comments from some G7 officials that the United States was circumventing international trade rules with the tariffs or ceding leadership of a global economic and trading system it largely built after World War Two.

The G7 heads of governments’ meeting will take place later this week in Quebec, Canada.

U.S. – China Trade tensions

Also, over the weekend in China, U.S. Commerce Secretary Wilbur Ross met with Chinese Vice Premier Liu He for discussing further building the consensus that was reached last month in Washington, when China agreed to increase significantly its purchases of U.S. goods and services.

Nothing substantial was agreed on.

The only tangible that came out of the meeting was a statement from the Chinese side and was published by the China’s state-run news agency Xinhua: “All economic and trade outcomes of the talks will not take effect if the US side imposes any trade sanctions including raising tariffs."

The G7 heads of governments’ will meet later this week in Quebec, Canada.

Trade is causing considerable concern with lots of rather strong language being used as of late. Any sense of escalating trade tensions carries greater risk for global financial markets, and thus for investors, than for the global economy because large listed companies disproportionately engage in international trade.

For the time being, the global economy is just doing just fine. The political noise is, at least for now, a distraction, and most people are just getting on with it.

U.S. economy

Last Friday’s employment report continued to show the underlying strength of the U.S. economy that has been building for several years now. Taxing trade will cost America jobs but probably it will not cost enough jobs that the effects would be seen in an economy that is performing OK. This is of course important for investors to take note of.

U.S. Durable Goods

U.S. durable goods orders are due today. The issue with durable goods and capital spending is whether this truly reflects investment anymore.

E-commerce has increased exponentially in recent years, but investors in technology and software has proportionately declined. That’s because the economy is making better use of its existing overall capital stock.

This is a relevant statistic for investors to watch. 

Etienne "Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.

© 2018 Newsmax Finance. All rights reserved.

   
1Like our page
2Share
HansParisis
There is however an option available to the Fed to help in some way emerging economies and that does not require it to change the overall policy direction. It can simply recalibrate its normalization plan, adjusting for the impact of the deficit.
china, g7, trade, investors, economy
758
2018-49-04
Monday, 04 June 2018 07:49 AM
Newsmax Media, Inc.
 

Newsmax, Moneynews, Newsmax Health, and Independent. American. are registered trademarks of Newsmax Media, Inc. Newsmax TV, and Newsmax World are trademarks of Newsmax Media, Inc.

NEWSMAX.COM
MONEYNEWS.COM
© Newsmax Media, Inc.
All Rights Reserved