Emerging Market FX Hits Fresh 5-Year Low - Contagion Unfixed

It was only a few days ago that Emerging Market FX was rallying on the back of a Turkish Central Bank rate hike that "fixed" everything. It was only a few days ago that investors were told they were "stupid" if bearish on US stocks because of EM weakness. Things have not gone as planned. That temporary blip has been demolished and EM FX has crumbled lower to fresh 5-year lows with many hitting record lows... and no, this does not mean money will flow back into US stocks (as we exclaim below).

  • *COLOMBIAN PESO EXTENDS DROP, FALLS 1.7% TO 2,050.25 PER USD
  • *ARGENTINE PESO WEAKENS 0.2% TO 8.0344/USD IN OFFICIAL MARKET
  • *TURKISH STOCK INDEX DECLINES 2ND DAY TO LOWEST SINCE JULY 2012
  • *YANUKOVYCH SAYS UKRAINE MUST STOP `EXTREMISM AND RADICALISM'

 

EM FX hits fresh 5-year low...

 

As the hope of "fixed" is gone...

 

We suspect the topic of "buying US stocks because money will flow back to the US from EM" will be popular among asset-getherers (and Tom Lee) - we offer the following clarification of that idiocy (from Sean Corrigan):

The ironists among market punters will even attempt to construe all this as a reason to buy more developed world stocks on the premise that the money flooding out of such places as Thailand, the Ukraine, Turkey, and Argentina will be parked in the S&P and the DAX (perhaps overlooking the fact that the purchase price of these now-unwanted positions was most likely borrowed, meaning that their liquidation will also extinguish the associated credit, not re-allocate it).

 

...

 

For their part, the biddable are already trying to drown out the noise of the Cacerolazo by making the fatuous argument that the EMs account for such a piffling portion of world GDP that their fate should be a matter of complete indifference to the rest of us.

 

Needless to say this is a touch disingenuous at best. Their share of end consumption-biased GDP may be lower, but they account for an equivalent fraction, if not a small majority, of global industrial production – and they have been responsible for an even bigger proportion of its growth this past decade. Ditto for trade and ditto for resource use.

 

Spot the difference - one of these is EM FX, one is USDJPY, and one is the S&P 500...

 

Charts: Bloomberg