Citi Fears The Emerging Market Volatility "May Just Be The Beginning"

Tyler Durden's picture

Via Citi FX Technicals,

Up the escalator, down the elevator shaft

The volatility in Local Markets which began in 2013 may just be beginning as much of the excess liquidity that went in search for yield may reverse course. During the next few months to few years, we would not be surprised to see even greater stress as the “Greenspan/Bernanke/Yellen put” begins to fade and volatility returns to markets.


LatAm is coming under pressure with Brazil, Mexico, Chile and Colombia all setting up for further losses. In CEEMEA, stress has been more selective with Turkey, South Africa, Russia and Hungary being the countries in focus for now.


While Asian Local Markets remain relatively calm compared to LatAm and CEEMEA, the ADXY Index is testing a major support level at 115. A monthly close below there would be concerning and suggest Asian currencies could come under significant pressure.

We can’t help but feel that the current pressure being felt in Local Market currencies and equity indices may only be starting. As we pointed out yesterday (and re-printed here), the backdrop over the last decade is very similar to that seen from 1989-1998 when:

1989-1991: US housing and Savings and Loan crisis: Fed eases aggressively as economy enters deep recession


1992-1994: Existing financial architecture in Europe (ERM) blows apart


1995-1998: European convergence trade in both FX and Bond spreads keeps European currencies relatively stable vis a vis the USD with a good rally in 1998. By 1996 BUBA has lowered the discount rate to 2.5% while US rates remain well below the pre-crisis highs of 9.75% in 1989.

The carry trade and capital flow into emerging markets (Asia in particular) is center stage:

March 1997: In a seemingly “innocuous” move the Fed “tinkers” by raising rates 25 basis points.


April 1997: Japan raises its consumption tax as USDJPY has rallied from a post Kobe Earthquake low of 79.7 to 127.50. USDJPY collapses to 111 by June


June 1997-Jan 1998: Severe reaction in Asian currencies as “hot money flees”


August-October 1998: Russia defaults, Long term capital folds and the Fed eases aggressively as the Equity market drops 22% (S&P)

History may not repeat…..but it sure RHYMES

In the years since the Financial Crisis, major Central Banks have been engaged in incredible easing programs that included the injection of massive amounts of liquidity into the financial system. That liquidity had to go somewhere, and in a search for yield, much of it went indiscriminately into Local Markets.

The announcement by the Fed in May 2013 that it would be looking to reduce its bond buying program was the first indication by a major Central Bank that the period of free money/excess liquidity was going to start winding down. The immediate reaction was panic and volatility across all “risk” assets, with Local Market currencies and equities being especially vulnerable. Soon after, though, markets began to adjust to the reality that this was the beginning of the end of the “Bernanke/Yellen put” (at least for now) and since then we have seen Local Markets come under pressure.

So far, the exodus of money from Local Markets has been “tame” compared to previous EM crises and it has also been selective since countries with weaker economies and foreign reserves have been the ones taking the largest hits. However, our bias is that this is just the beginning. We have only begun to see “volatile” price action and the charts in the following pages show just how far some of these Local Market currencies and equities can go. In focus for now is LatAm and select CEEMEA countries as they have come under the most pressure.

However, the bigger danger over the next few months/years is that the markets begin to ‘throw out the baby with the bathwater” and Local Market investors begin to exit through the same small door.



Though Asia Local Markets have been rather calm in comparison to other regions, we still think caution should be maintained

The ADXY Index is testing very good support at 115, the 55 month moving average, and a close below there on a monthly basis would be bearish. If seen, it would also be the first close below the 55 month moving average since 2008.

There is good support closely below there around 113.58-113.68, the 2012 and 2013 lows which also serve as the 76.4% retracement pivots of the 2011-2012 decline

A break below there would further suggest even larger losses are likely, potentially towards the 200 month moving average which is currently at 106.75 (there is support before there at 108.77, the 2010 low,that would be worth keeping an eye on).

It is important to note that 49% of the Index is made up by CNY and HKD. As we are not currently of the bias that these currencies would see significant (if any) depreciation even if the EM sell-off were to become more aggressive in Asia (as a reminder, during the major ADXY collapse in 2008, USDCNY and USDHKD remained essentially unchanged)

As a result, if we were to see a continued bearish development in the ADXY, it would suggest the other currencies in the Index (INR, IDR, KRW, MYR, PHP, SGD, TWD and THB) would see greater weakness then the overall weakness. We will be watching for any developments closely...

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Overfed's picture

Anybody here gettin' the feelin' that you're gonna wake up one morning to news footage of tanks in the streets? Like real soon? BTW, I would be more than happy to take a few million of that excess liquidity off somebady's hands and put it to good use. Preferably before it goes full-on Zimbabwe.

Soul Glow's picture

A 30% correction in world equity markets, an increase in QE - a short stop gap - and then a Treasury auction failure.  Then a pension cut, then a forced purchase of USTs in 401k plans, then total chaos as the dollar is "revalued".

I'm thinking it all ends in a year, but this chain of events has begun.

Overfed's picture

30%? I'm gettin' out my Dow 6000 hat. But hey, I don't know shit about financials, that's why I come here.

Soul Glow's picture

Stocks became overbought above DJ 15k.  The only reason it got that high was due to the market inflation employed by the Fed's policy actions.  But with any bubble the dumb money chased it, taking it above 16k.  So as with the proper selling - remember GS just released a letter saying a 30% pullback is in the cards) - there will be dumb selling, making a proper 20% correction a 30% correction.

Get out your Dow 10k hat, it's time for the chickens to come home and roost.  

philipat's picture

On the other hand, it might be because this time is not really an Emerging Market problem? To call a spade a spade, this is truly "The American crisis" caused by too much debt and too much leverage in The US, about which nothing has been done except to create even more debt.

Soul Glow's picture

The US loves to pass the buck.

Oracle of Kypseli's picture

I am wondering if the delayed introduction of the new dollar currency design will play a roll in the reset.

Wahooo's picture

Just like all the other times.

Iam_Silverman's picture

"and then a Treasury auction failure."

Can that really happen, I mean as long as there are Primary Dealers around?  I think that as long as there is one PD left with access to the TALF window, there won't be an auction that has zero subscription but the PD and "invisible directs" takedown number would be a glaring clue to those who pay attention.

Soul Glow's picture

The answer to your question lies in how much you think can be lent overnight.  If there is a margin call, and the proper monies aren't in the proper places, the PD would have to sell assets to cover.  If they don't have the assets due to leverage, well, then they can't participate in the next days auction.

disabledvet's picture

How do i put tanks in the streets of Shanghai?
That's a City of 30 million!

"You wanna run that thing?"
Good luck.

JP Morgan is buying gold.
nuff said.

If Ukraine suddenly "goes hot" I think you'll see the reporting on events change muy rapido.

TheLooza's picture

I don't have that feeling, sorry.

ArkansasAngie's picture

I don't think these boys know what a local market is.  

I think local markets ... in the US ... should start keeping our money so it doesn't end up where these yahoos think it's local.

gwar5's picture

Almost there already in some places. Wouldn't take much more. Escalation is not just a happy Eskimo with a new snowmobile.

The Dunce's picture

Life is filled with drama.  But I try not to be an alarmist.  The markets have tanked before.  And they will tank again.  Big deal.  Who gives a shit.

GeorgeHayduke's picture

If they put tanks in the street they will only be in certain locations to protect certain people and their property. The owners don't care one bit about what happens in the streets to the Plebes and their homes and businesses. Most of the places the owners care about already have their security whores in place, are difficult to reach due to geography, or they are hiding in plain sight and will likely be overlooked. They may roll the local police forces armor units out (in the freedom-boasting USA no less) to protect some communities, businesses and resources, but they too will likely be selected by who's connected and what they have to offer.

That said, you couldn't give me a house in gated community these days, especially if it's not really politically connected and is rather a place where people live to express their separateness and therefore perceived security from everyone else. Those places may not fare too well if things get dicey. Just my thoughts on it, I might be wrong.

kenezen's picture

Not wrong DC will have a massive ring of protection!Most others are on their own!

kenezen's picture

50-50 opportunity before this coming election in the international betting poles of conspirator theorists. chance for 15% violent. The military has been reorganized recently from the top more than any time in our history! Move by Senate to re-do 96 years of precedent to allow simple majority votes for DC Circuit Judges very loyal to President hence blocking Supreme Court access to Congress done! Broad speech preparation to supporters; "I will do all I can without Congress"!Done!


Need to move before a tough election because of real povery still very bad and no manufacturing jobs for our kids still bad. Lies of 6% unemployment and other misdirection "You can keep your insurance" wearing thin. President is now being seen as talker not doer! If it is to happen it will be prior! Class warfare and bad job choices bad!  Independents are waking up. This is now President centric. 

Soul Glow's picture

A 20% - 30% equity market correction is in the works.

disabledvet's picture

what equities are going to do is the least of my worries.

the "false reality" that has been constructed since 2008 is really quite stunning...but there simply is no way to "steal" your way to the top with this big of a war effort underway that is exclusively "over there." and that's what worries me.
we have the biggest energy boom in US history underway.
I'm not worried about markets in the USA.

in fact billions...if not more...are flooding into the vaults at Citigroup.

that would be DOLARES.

forget treasuries which have a massive rally underway and in my view much further to go and just think in terms of cash.
what "assets" can a Money Center Bank monetize in such an environment?

In my book "you name it."
you need to restructure the debt of a coal mine?
I really don't think that's a problem here.
Railroads have sold off...but if they stabilize that will be the "backer" for the effort...even if the mine isn't producing.

Soul Glow's picture

We are not having the biggest energy boom in US history.  That occured when Texas found its sweet tea and those days were numbered in the 30's.

US oil production peaked in the 70's.  We are not producing more than we did then.  

And the shale production will begin to fall in 5 - 7 years.  It is not sustainable.

Iam_Silverman's picture

"A 20% - 30% equity market correction is in the works."

<font/sarc-ON> Well, if that's the case, I want to move my money someplace safe.  You know, where I am guaranteed not to lose it!  I think that the MyRATM may be just right for me! <font-OFF>

Wahooo's picture

Hope so, I want to buy some oils.

Soul Glow's picture

Oil, silver, and all that shit.  It doesn't need to fall when stocks and the dollar do.  Just saying.

fonzannoon's picture

We may see the Nikkei break below 14k tonight. The 10yr JGB may break below .6%.  I mean ho le shit can Japan do this for another 20 years?  If this does not scream out that the whole system is rigged together than nothing does.

Soul Glow's picture

Japan will get the worst of the market crash that is currently under way.  They will correct 30%.

BandGap's picture

Hovering around 14100 right now. I'd take that bet.

Atomizer's picture

Sounds like the bank that never sleeps is 1 of 3 that is insolvent..

chump666's picture

Wow, Hang Seng down over 2%, Nikkei too!  Europe opens gap down at 2%, more so the DAX, futures should start to tank hard.  Looks like a substantial correction is setting in or move to crash.  The machines are now keeping futs bid, could be a fleece for suckers.  Those things could flip this market hard.

Soul Glow's picture

The Fed is "exiting", the BoJ is "exiting", or planning to.  Obviously the governments realized they don't have as much wiggle room as Krugman believes.  The ivory tower theory does fall short when one realizes all that money printing is done so to buy bonds, and both are expanding exponentially; but to expand the money supply infinately is to create a hyper inflation of the currency.  Remember how everyone says hyperinflation is a loss of faith in the currency?  

The only thing that "currency" has going for it right now is that all policy is the same and if the perspective of the viewer - the media interpretation of it - is falling with gravity as all currencies are, then they aren't appearing to deveate.  Look no further than the EUR/USD which is pegged - yes pegged - at $1.35.  

All currencies are in freefall and the stock market is crashing.  And gold is up.

disabledvet's picture

why do you need "wiggle room" when you have a reserve currency?

the only reason to make that claim is that you've failed to prevent a massive deflation.

the jury is still out on the USA on that one.
But that doesn't seem to be the case in Japan (ongoing) and Europe (only just begun.)

If China is now deflating...well, that's a lot of stranded capital with a LOT of overhead attached to it.

Soul Glow's picture

What is the reserve currency?  It is the currency of the Empire, and the US empire has reached its peak.  Will something replace it right away?  Likely not, as all other Nation-States participated in the same economic policies.   It often takes time for the next super power to emerge.  Who it will be next time, no one knows.  Often, all it takes is a good leader.

fijisailor's picture

All these TBTF banks trying to create an EM panic.  Is all this liquidity pouring out of EMs supposed to run for the "security" of DM equities?  Good luck with predicting this.

pachanguero's picture

I live here in Thailand and it's getting ready to freefall.


Cheaper beer and hookers!

BandGap's picture

Live for the moment, brother.

satoshi911's picture

I have that feeling also, ... everything has suddenly changed,

I see lots of boats coming and going up&down the Mekong, and hear new story's everyday,

Most telling is what is loaded on the boats these days.

The chinese have been buying real-estate big in Laos, & Myanmar, with new bridge in Chiang-Khong(thai) to Laos, real-estate has sky-rocketed, but now hearts are changing and quick.


Anyway long ago ships ( up the Mekong, mega-barges ) coming to CHINA from ASEAN was mostly rice and cooking oil, now I'm seeing bags of ready-mix, ... me thinks that lots prison building is on somebodys mind.


Yes, if rice&oil isn't going to  CHINA, that means it ain't going anywhere, and if rice prices implode, then the hookers will be working for almost nothing.

Atomizer's picture

No,  they are fucking with the market. 15-20 % correction.. The manchild fucks who think they control this market are mistaken..Wait until your planed QE drug crime scene hits the news. We can arrange for much worse scenes to expose you on the MSN.. Winks.

gwar5's picture

Citibank would know.  FED orchestrated flight to safety out of EM into USD to sop up the taper mess. But now that the US is also a Banana Republic we will not be spared.

Soul Glow's picture

The USD is weak.  If the Dollar is still King why does its 20 year chart look so pathetic.  And Bush/Greenspan did everything they could to kill the dollar.  So did Clinton, and so has Obama/Bernanke.

The Dollar is dead, long live fiat.

disabledvet's picture

because its measured against euro's, yen and yuan.

the yuan valuation is a that "number" makes no sense.

the only currency value trade weighted that has any meaning to the dollar is the Canadian Dollar.

We have MASSIVE trade flows with our neighbor to the North.
The dollar has gone parabolic against the CDN...although well off what i would call "normal" (around 1.20.)

These are tremendous moves right now...and the only credit creation going on to scale anywhere is inside the United States.

Even most of China's "boom" is State managed (real estate speculation at best.)

Soul Glow's picture

The dollar is dead, long live fiat!

gwar5's picture

Well that's really it, isn't it. The dollar is crap too. 

As P. Craig Roberts indicated, tapering is so the FED can kick the EM's and try to show them who's still the boss, to keep them on the USD plantation. Onging currency wars are getting hotter. Said tapering is a short term gimmick by the FED that'll have to be reversed coz FED can save the USD or the banks --- but not both. 


Iam_Silverman's picture

Tanks in the streets?  Anyone notice the cost of diesel lately?  It costs a fortune to top off both tanks in my truck these days!


What would the tanks do, anyway?  Tell people to stay at home and shop on Amazon?  Not go to work?  Not consume?  All I can see them doing is causing a traffic jam.  Obama needs that kind of notoriety as much as Chris Christy did....

Proofreder's picture

While you are rearranging the deck chairs,

I'll go find the orchestra -

they were taking a brief break - just the beginning of our grand voyage.

I'll grab some ice for our drinks, too

there's some right on the deck, up near the bow.

Bon Voyage.


TheRideNeverEnds's picture

Looks like I picked the wrong week to quit sniffing glue.

Soul Glow's picture

Just pick up a herion habit.  It worked for Philip Hoffman, until it didn't.

luckylongshot's picture

Since Citi is one of the groups responsible for causing the emerging market volatility, why are they pretending to be neutral observers. It would be better for them to come out and say 'we have a strategy to try and rescue the USD as the world's reserve currency that hinges on us causing emerging market chaos.'