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EM currency crisis pose additional risk to equities

Fawad Razaqzada Fawad Razaqzada 12/10/2021
EM currency crisis pose additional risk to equities EM currency crisis pose additional risk to equities
EM currency crisis pose additional risk to equities Fawad Razaqzada
Stock markets have been struggling of late. Although the major indices have managed to come off their worst levels, the bulls have been reluctant to step in aggressively. Among other reasons, the troubles for emerging markets could be an additional risk that could hang over the markets in the months ahead.

Stagflation has been more of a concern for emerging markets than the more advanced economies. Some emerging market currencies such as the Turkish lira have been struggling badly in the face of surging inflationary pressure and low economic growth. With oil prices surging to above $80 a barrel, this has been particular bad for nations such as India and Pakistan, two net oil importers. Exacerbating the crises, the US dollar has been pushing higher on expectations that the Fed will taper its bond purchases before the end of the year. As crude oil and other commodities are priced in the dollar, this has made the situation even worse.

Meanwhile demand from Europe hasn’t recovered as strongly as expected, hurting EM exports of goods and services. Tourism in Turkey for example. But the ongoing supply chain bottlenecks and energy crisis have also caused all sorts of problems in the Europe, as emphasized for example by the softer-than-expected German ZEW survey released this morning (22.3 vs. 26.5 last).

All told, the outlook doesn’t look great for EM. The US dollar might strengthen further as the Federal Reserve (and other global central banks) might be forced to tighten policy faster than expected to prevent high inflation turn into hyperinflation, and to avoid the risks of stagflation taking hold.

Among others, keep an eye on the Indian Rupee, which has been dropping sharply off late. India is a major oil importer, so there’s little surprise to see her currency struggle.

EM FXSource: ThinkMarkets and TrdingView.com
 

Looking ahead

 
Meanwhile the focus will remain on the dollar and inflation as we look forward to the rest of the week. We have some important macro pointers coming in, starting with US CPI on Wednesday:
 
Wednesday
 
  • UK data dump including construction output, manufacturing production and monthly GDP estimate
  • US CPI
  • FOMC meeting minutes
On Wednesday we will get to find out exactly how hawkish they Fed was at its previous meeting and whether they were already making plans about tapering QE in November.

We will also get the latest inflation data from the world’s largest economy. CPI has already surpassed the Fed’s target and overshoot all sorts of expectations. If we see another sharp rise in prices this might trigger concerns that the Fed will taper QE faster than would ideally be the case. Stocks could drop and yields might jump if this is the case.
 
Thursday
 
  • Australian employment report
  • Chinese CPI
  • US PPI and jobless claims
Friday
 
  • US retail sales, Empire State Manufacturing Index and UoM’s consumer sentiment and inflation expectations indices.
Stagflation concerns have been rising in recent weeks as inflationary pressures have been growing with energy prices surging etc. If the UoM survey show consumer inflation expectations have risen while sentiment towards the economy has dropped, this will provide hard evidence about the risks of stagflation.
Any opinions, news, research, analyses, prices or other information contained on this website is provided as general market commentary and does not constitute investment advice. ThinkMarkets will not accept liability for any loss or damage including, without limitation, to any loss of profit which may arise directly or indirectly from use of or reliance on such information.

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Meet our contributors
Fawad Razaqzada
×
Fawad Razaqzada
Market Analyst, London

Fawad is an experienced analyst and economist having been involved in the financial markets since 2010, producing market commentary and research for a number of global FX, CFD and Spread Betting brokerage firms. He leverages years of market knowledge to provide retail and professional traders worldwide with succinct fundamental & technical analysis. Fawad also offers trading education to help shorten the learning curves of developing traders.
 
His colleagues consider him an expert at reading price action on the charts. This together with his deep understanding of economics and fundamental analysis, and trading experience, puts him in a great position to forecast short term price movements. Fawad covers a wide range of markets, including FX, commodities, stock indices and cryptocurrencies and his comments are regularly quoted by the leading financial publications such as Reuters and Market Watch. In addition to ThinkMarkets, Fawad also provides analysis and premium trade signals on his own website at TradingCandles.com.
 
 

Carl Capolingua
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Carl Capolingua
Market Analyst, Melbourne

Carl has over 20 years' experience in financial markets and has held senior analyst roles at a number of financial institutions. Specialising in Australian and US stock markets in particular, Carl uses a top-down approach to assess the global macro picture before using both technical and fundamental techniques to select stocks. He regularly appears as an expert commentator on a number of media outlets throughout the Asia-Pacific region.
 
 
 

Kearabilwe
×
Kearabilwe Nonyana
Market Analyst, South Africa

Kearabilwe is an experienced Sales trader and Analyst specialising in Equity and Equity derivatives. His career in the financial markets has seen him hold various positions in global investment banks and global CFD and Spread betting firms. He has deep interest in using quantitative methods to help him understand and teach the fundamental drivers of asset prices.
 
 
 

Fawad Razaqzada
Fawad Razaqzada
Fawad is an experienced analyst and economist having been involved in the financial markets since 2010, producing market commentary and research for a number of global FX, CFD and Spread Betting brokerage firms.
Carl Capolingua
Carl Capolingua
Carl has over 20 years' experience in financial markets and has held senior analyst roles at a number of financial institutions.
Kearabilwe
Kearabilwe Nonyana
Kearabilwe is an experienced Sales trader and Analyst specialising in Equity and Equity derivatives.

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Any opinions, news, research, analyses, prices or other information contained on this website is provided as general market commentary and does not constitute investment advice. ThinkMarkets will not accept liability for any loss or damage including, without limitation, to any loss of profit which may arise directly or indirectly from use of or reliance on such information.
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