Emerging markets

While every year holds its own distinct global risks and opportunities, the world appears particularly vulnerable as it enters 2018. The form Brexit will take is still unclear, there are new tensions in the Middle East to go along with the eternal tensions we have grown accustomed to, Europe threatens to disintegrate in multiple secession efforts similar to Catalonia, two unstable leaders continue to sabre rattle threatening war on the Korean peninsula and the world’s stable leader, the United States, doesn’t seem so stable all of a sudden.
Global markets have been on a tear, hitting fresh highs supported by low rates and synchronized global growth. Emerging markets have benefitted from record inflows to rise strongly this year, but political risk seems to be rising even as volatility is falling (see “Emerging markets soar,” below).
We have been surprised and wrong on emerging markets. We were expecting a breakdown in EM on the back of rising debt levels and a stronger U.S. dollar. Instead, EM stocks keep climbing along with other world equity markets. But just maybe we are there, i.e. time to get short?
Inflation just got another jolt, rising as much as 2.5 % year-over-year in January, the highest such rate since March 2012.

With Tokyo markets offline for a bank holiday (happy Coming-of-Age Day to our Japanese readers) following the late day collapse in U.S.

Emerging market companies with debt in dollars and revenue in sinking local currencies could struggle as the U.S. Federal Reserve begins what is expected to be a series of interest rate increases after years of easy money policies.
Money is fleeing emerging markets en masse in 2015 for the first time in 27 years and few global investors are tempted to return to equities, currencies or bonds there as many of the populous economies defining the asset class slow inexorably.
With a plethora of major central bank announcements out of the G10 this week, traders will be more focused on developed markets than their emerging market rivals, so we wanted to take a moment to reset the technical outlooks for the major EM pairs we follow.
A rise in market expectations for U.S. interest rates as the Federal Reserve starts to normalize policy could cut capital inflows to emerging markets by as much as 45%, World Bank economists said in a paper published on Tuesday.
Thousands of gallons of virtual ink has been spilled on the market implications of the Federal Reserve’s monetary policy meeting decision on Thursday, and we’ll undoubtedly see plenty more analysis over the next few days.