EM currency crisis pose additional risk to stocks

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.

Source: ThinkMarkets and TrdingView.com
 

 
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
 

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
 

Friday
 

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.