Top of the Morning: Emerging Markets - Fed hikes matter, but global liquidity matters more
At a Glance
The desk highlights that global liquidity dynamics are gaining precedence over Fed rate decisions in shaping emerging market conditions. Per the full note from UBS, while the FOMC hike sends immediate shockwaves, it's crucial to consider that aggregate liquidity remains favorable. This analysis suggests heightened fund flows towards emerging markets when conditions are less restrictive, an insight supported by stable credit spreads and robust equity performance across various regions. The consensus outlook suggests a nuanced alignment with these views, but with notable divergence on specific targets, mainly held in the context of near-zero default risk in emerging market bond assets.
Key Takeaways
- 01Liquidity conditions are key to EM performance, overshadowing Fed actions.
- 02Tight credit spreads and high equity valuations suggest ongoing investor interest.
- 03Divergence in targets indicates varied market anticipations regarding EM pricing.
Full Analysis
What the desk is arguing
The desk contends that the implications of Fed rate decisions are contextualized within broader global liquidity trends that ultimately shape emerging market asset performance. Per the full note from UBS, the liquidity provided by global markets outweighs the significance of the Fed's policy direction in influencing fund flows and asset pricing in emerging economies.
Evidence from market conditions shows that despite rising expectations for Fed rate hikes, liquidity remains ample. For example, credit spreads across many asset classes are tight, and equity markets continue to achieve record highs, implying a favorable backdrop for EM investments despite looming uncertainties.
Where it sits in our coverage
Currently, we have a consensus target for the USD/EUR exchange rate at 1.075, with the range indicating potential fluctuations between 1.04 and 1.12. Specific targets include:
The desk's perspective aligns with the overall sentiment from jpmorgan, positioning slightly above their target, while it diverges from bofa, which anticipates a sharper downward movement. The divergence emphasizes how differing views on liquidity constraints can shape emerging market strategies moving forward.
How other firms see it
Firms such as jpmorgan and goldman echo the desk's sentiment regarding favorable liquidity conditions, suggesting a bullish stance towards EM assets. Conversely, bofa presents a more cautious outlook, indicating volatility in these markets could lead to shifts in investment flows.
Analysts should also observe the trajectory of USD/JPY and USD/BRL as these pairs often mirror broader liquidity trends associated with Fed decisions, particularly in emerging markets.
Market Implications
Traders should monitor the USD/EUR level around 1.075, as any significant deviations could signal shifts in investor sentiment regarding EM stability. Additionally, upcoming market reactions to Fed communication or unexpected macroeconomic data could influence positioning significantly.
From the original
In the wake of the September FOMC rate-hike, we discuss the implications of a Fed hiking cycle to emerging market assets, including equities and fixed income. We also cover the risks to emerging markets that investors should be mindful of. Featured is Alejo Czerwonko, Chief Inves
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