"Expect More Pain": As EM Contagion Goes Global, Wall Street Sees No Way Out

With Trump set to announce another $200BN in Chinese tariffs as soon as Thursday, sparking fears of a more acute phase of global trade wars and sending the dollar higher and US equity futures lower, the emerging market contagion vortex is starting to take on a life of its own and as Bloomberg notes this morning, "even when the most vulnerable countries vow to protect their currencies, the dollar steps in to rain on their parade."

As noted earlier, the selloff in emerging market currencies has been relentless, dragging down the MSCI FX index to the lowest level in over a year, pressured by the trio of the South African rand, which dropped after Pretoria reported that the nation had entered only its second recession in 9 years, the Turkish lira, which is down again after the central bank failed to restore confidence that even a telegraphed rate hike will be sufficient to curb the country's soaring inflation, and the Argentine peso which slumped 4% yesterday after president Macri's latest announcement of emergency measures did little to raise sentiment.

Meanwhile, in addition to the imminent announcement of a new $200BN in China tariffs, US investors are now eyeing the Fed's September rate hike which now appears inevitable, helping the dollar extend gains which in turn is further pressuring emerging markets amid deepening worries over idiosyncratic risks in emerging markets including Argentina’s fiscal woes, Turkey’s twin deficits, Brazil’s contentious elections and South Africa’s land-reform bill.

And after observing developments in emerging markets with a sanguine eye for months, Wall Street analysts are finally starting to get concerned, and as the following soundbites demonstrate, as long as the Fed keeps tightening rates, virtually nobody sees a quick - or any - way out to break the global emerging markets contagion "doom loop":

The dollar is winning by default, according to Kit Juckes, a global strategist at Societe Generale: "There’s not much to make me think the dollar should be going up, but there’s plenty to make me nervous about other currencies. The dollar is very strong and lacking rate support, but other currencies are worse."

Below, courtesy of Bloomberg, are some other hot takes from Wall Street analysts:

"It’s Not Enough", from Tsutomu Soma, general manager for fixed-income trading at SBI Securities Co. in Tokyo:

  • “The measures announced by Argentina and Turkey are probably not enough to lead to a significant improvement in their fundamentals”
  • “Contagion risks to other emerging markets are growing especially as the Fed tightens”

"Set to Suffer"; from Michael Every, head of Asia financial markets research at Rabobank in Hong Kong:

  • “Emerging-market FX are set to suffer almost regardless of what they do, the only issue is how much"
  • "The dollar will remain on the front foot against emerging markets as long as the U.S. continues to raise rates and boost fiscal spending while keeping the trade war fears on the radar"

"Further Pain". from Lukman Otunuga, research analyst at FXTM:

  • “Emerging market currencies could be destined for further pain if the turmoil in Turkey and Argentina intensifies”
  • “The combination of global trade tensions, a stabilizing U.S. dollar and prospects of higher U.S. interest rates may ensure EM currencies remain depressed in the short to medium term”

"A Penny Short", from Stephen Innes, head of Asia Pacific trading at Oanda Corp. in Singapore:

  • Argentina’s measures are “likely a day late and a penny short”
  • “These moves are a step in the right direction, but they’re unlikely to be convincing enough to remove currency speculators from the driver’s seat. I guess it’s all down the IMF’s ‘White Knight’ to the rescue. However, we are getting into the realm of unquantifiability which makes the market utterly untradable"

"Most Vulnerable", from Masakatsu Fukaya, an emerging-market currency trader at Mizuho Bank Ltd.:

  • "Contagion risks from Argentina and Turkey are growing for other emerging markets and economies with weak fundamentals such as those with current-account deficits and high inflation rates"
  • "Currencies of countries such as Indonesia, India, Brazil and South Africa have been among most vulnerable"
  • "The Fed’s rate increases and trade frictions means the underlying pressure on emerging currencies is for a further downward move"

Source: Bloomberg