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| 09 October, 2018

Are emerging markets positioned for further punishment in Q4?

Lukman Otunuga is a research analyst at FXTM. A keen follower of macroeconomic events, with a strong professional and academic background in finance, Lukman is well versed in the various factors affecting the currency and commodity markets. Lukman holds a BSc (hons) degree in Economics from the University of Essex, UK and an MSc in Finance from London School of Business and Finance, where he studied corporate finance, mergers & acquisitions and the role of international financial institutions.

Website: www.forextime.com

Continued strength of the U.S. dollar and trade tensions are causing ongoing pressure on a number of emerging market countries


There is no denying the fact that investor sentiment towards emerging markets has considerably deteriorated in recent months.

Market themes in the form of ongoing trade developments, tightening global financial conditions and a broadly stronger Dollar have offered nothing but pain and misery for emerging markets. The growing optimism over the US economy coupled with mounting expectations of higher US interest rates have compounded negative sentiment towards EM currencies and assets. With the recent spike in US Treasury Yields adding to the jitters by spelling higher borrowing costs for developing nations, the outlook remains somewhat gloomy. No prisoners were taken as even EM currencies boasting robust fundamentals found themselves in the firing line. However, economies possessing current account deficits and high levels of debts took the biggest hit.

The mounting pressure on emerging markets continues to send ominous warning across the board. In Indonesia, the Rupiah has tumbled to its lowest level since the Asian financial crisis in 1998. Although Bank Indonesia has aggressively raised interest rates 5 times since mid-May, this has offered little support to the Indonesian Rupiah. In South Africa, the Rand is a clear casualty of domestic and external factors with the nation recently sliding into a recession. The Indian Rupee has been hammered repeatedly by the unfavourable environment for EM with prices crashing to a new record low past 94.00 during the start of Q4. Economies like Turkey, Argentina, Brazil among many others are all feeling the heat from higher US interest rates, market caution and Dollar strength. While there has been a trend of central banks from developed nations tightening policy to defend their local currencies, this has done little to limit the downside pressures.

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As the final trading quarter of 2018 gets underway, EM could be instore for another rough and rocky ride downhill. Market expectations remain elevated over the Federal Reserve raising US interest rates in December and at least another three times in 2019. With the interest rates differentials clearly in favour of the Dollar, this could only spell more punishment for emerging markets. The uncertainty revolving around trade tensions could weigh heavily on global sentiment consequently resulting in prolonged periods of risk aversion. Appetite for Emerging market assets may deteriorate further in a risk-off trading environment as investors turn to safe-haven investments. For as long as the dollar remains king, expectations remain healthy over higher US interest rates and trade tensions dent investor confidence, emerging markets will remain in the crosshairs.

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