According to a report from the Wall Street Journal,the nerves about emerging markets are clearly visible. Despite an aggressive overnight rate increase from Turkey, and a subsequent increase by South Africa, emerging-market currencies sold off again Wednesday. The policy actions being taken should help rein in the imbalances that have worried investors. But it will take time for the evidence to emerge, and markets appear not to have much patience.
Turkey is at the center of investors' attention. Having failed to raise rates last week, leading the lira to slide to a low close to 2.40 against the dollar, the Central Bank of Turkey bowed to the inevitable.
But it appears not to have delivered a knock-out punch. Its interest-rate policy remains complex. While the CBRT lifted its headline rates by 4.25-5.5 percentage points, the effective rise in the rate at which it primarily provides liquidity to the market was 2.8 percentage points. The lira was highly volatile Wednesday, swinging between 2.16 and 2.30 lira to the dollar.
The pain is still spreading across markets. South Africa raised rates to 5.5% from 5%, but the rand continued to weaken against the dollar—even though the rate increase was unexpected. Once again, even emerging-market countries with good fundamentals, such as Mexico and Poland, saw their currencies suffer.
This still doesn't appear to be a systemic emerging-market crisis: Investors should differentiate between countries with strong and weak fundamentals. Worries about Argentina, Ukraine or Venezuela shouldn't bother most investors given their weak links with the global economy.
Even Turkey's rate increase should have the right effects over time, narrowing the current account deficit and cooling inflation, albeit at the cost of growth. A contraction in imports will narrow the deficit, although it will not address Turkey's heavy external refinancing needs. But it will take time for the market to see that.
In the meantime, markets are clearly fragile, and high volatility won't help. In advanced economies, the feedback is proving unpleasantly disconcerting for some big-picture and widely held trades. Treasurys have rallied hard, forcing bearish investors to cover short positions; stocks have failed to follow through on December's surge. The economic data have been more mixed than many expected except in Europe, where it has continued to improve.
But even with these nerves, the case for decent growth in advanced economies should still hold.And in that scenario it is also good news too for emerging markets.
The exit from QE in major economies will affect more,emerging market countries that had
fiscal and trade deficits , during the long period of loose monetary policy established by developed Central Banks. These countries will have a period of high uncertainty and volatility.
