Emerging markets have seen the longest streak of withdrawals on record, for five straight months flows have been aggressively flowing out. The soaring US dollar is causing systemic de-risking and deleveraging throughout the global periphery and frontier emerging markets. Liquidation and default risks are high in areas like private equity and venture capital. These types of reactions feed on with higher interest rates, stymieing growth and increasing risk.
In July outflows by international investors in EM stocks and domestic bonds was $10.5 billion according to provisional data compiled by the Institute of International Finance. That puts combined outflows at over $38 Billion for the last five months. This is the longest period of net outflows since records began in 2005. The risk in the subcontinent exacerbated the situation. Sri Lanka defaulted on its sovereign debt and Bangladesh and Pakistan have both approached the IMF for a rescue package.
Central banks around the world have been aggressively raising interest rates. This coupled with high inflation pushed these emerging nations closer to recession, if they are not already there.
Emerging Market Currencies
The peak in selling happened in the middle of July where EM CDS index traded up to 395 bps intraday the high back to April 3, 2020, before ending the week up 30 to 375 bps. EM CDS hasn’t had a weekly 50 bps jump since September 2020.
De-risking/deleveraging has turned more systemic throughout the global “Periphery.”
- Indonesia CDS jumped 20 this week to 165 bps, the high since May 2020.
- Vietnam rose 21 bps to 188 bps (July ’20),
- Philippines 18 to 148 bps (March ’20),
- Malaysia nine to 112 bps (May ’20),
- India seven to 175 bps (May ’20),
- Thailand six to 73 bps (April ’20)
- South Korea six to 54 bps.
- Hungary CDS surged 48 (to 230bps)
- Romania 39 (to 347bps).
- South Africa CDS surged 31 to 369 bps (high since May 2020)
- Turkey CDS 13 surged to an almost 20-year high 883 bps.
“Frontier” markets appear to suffer acute illiquidity.
- Mongolia CDS surged 161 to 604 bps (high August ’20),
- Egypt 344 (to 1,507 bps),
- Kenya 269 (1,417 bps),
- Iraq 131 (798 bps),
- Namibia 126 (728 bps),
- Argentina 274 (1,947 bps),
- Nicaragua 91 (695 bps).
- Colombia CDS surged 45 (332 bps),
- Brazil 37 (331 bps),
- Costa Rica 31 (335 bps),
- Uruguay 30 (167 bps),
- Peru 29 (158 bps),
- Guatemala 25 (332 bps),
- Panama 25 (158 bps),
- Chile 25 (141 bps),
- Mexico 18 (196 bps).
June losses for emerging market currencies were dramatic:
- Chilean peso dropped 10.3%,
- Brazilian real 10.0%,
- Colombian peso 9.2%,
- Polish zloty 4.8%,
- South Korean won 4.7%,
- Philippine peso 4.7%,
- Argentine peso 4.0%,
- South African rand 3.9%.
The run-on EM markets is unleashing a dangerous dynamic. When global liquidity flows abundantly, financial flows originating from U.S. trade deficits and leveraged speculation often find their way into higher-yielding EM securities. These flows end up at EM central banks, where they are conveniently “recycled” back into U.S. markets through (chiefly) purchases of Treasuries, agencies and other debt securities.
China Implosion Impacting Emerging Economies
What also fueled the massive selloff was investors chasing higher risk opportunities in late 2021 and early 2022 were betting on emerging economies recovering strongly from the pandemic. China is a big part of the problem, in 2008 China aggressively bought up commodities. This time around China is imploding within as we see in a collapse of their real estate market. The established markets, and the more vulnerable emerging economies do not have Chinese exports and banks’ ability to refinance loans has cratered.
Official PMIs from the China National Bureau of Statistics and the China Federation of Logistics and Purchasing for July put manufacturing PMI falls back into contraction. Manufacturing came in at 49.0, its lowest in 3 months and back into contraction, expected 50.3 and prior 50.2. Non-manufacturing was 53.8 versus expected 53.9, prior 54.7. The composite PMI was 52.5, down from June’s 54.1.
- Output shrank after rising in June (49.8 vs 52.8 in June),
- New orders (48.5 vs 50.4)
- Buying levels (48.9 vs 51.1).
- New export orders contracted at a faster rate (47.4 vs 49.5)
- Employment (48.6 vs 48.7).
- Delivery time slightly lengthened (50.1 vs 51.3).
- Input cost fell for the first time in seven months (40.4 vs 52.0),
- Output charges decreased for the third month running and at a steeper rate (40.1 vs 46.3).
- Sentiment eased from June’s 3-month peak (52.0 vs 55.2).
Shanghai remains largely shuttered for sixteen consecutive weeks. Air cargo operations remain severely constrained at PVG. Ramp handlers, truckers, and key employees have seen limited access to airport and cargo facilities. As a result, most major airlines and air cargo carriers have canceled flights in and out of PVG.
From The TradersCommunity Research Desk