Home' Trinidad and Tobago Guardian : June 7th 2015 Contents JUNE 7 • 2015 www.guardian.co.tt SUNDAY BUSINESS GUARDIAN
STOCKS | SBG13
Stocks and currencies
are not the only mar-
kets caught up in the
bond market turmoil
this week. Emerging
markets have also felt
the pain, highlighting
their vulnerability to
events in the developed world.
MSCI s emerging market stock index was
on track Friday for a third straight week of
losses, while the Indonesian rupiah hit a
17-year low against the dollar earlier in the
day and the Russian ruble hit a two-month
low on Thursday.
This week s sell-off in global bond prices,
pushing yields on US Treasury and European
government bonds sharply higher on chang-
ing perceptions about the inflation outlook,
has spilled over into emerging markets.
And analysts say it s exacerbating the
volatility at a time when jitters about the
timing of a possible rise in US interest rates
and concern about Greece s future in the
euro zone have tempered appetite for risky
"Sentiment towards emerging markets
has deteriorated significantly on the back
of the sell-off in government debt markets,
with a sharp increase in outflows from
emerging market debt funds this week,"
Nicholas Spiro, managing director at Spiro
Sovereign Strategy, told CNBC.
"Emerging markets are facing a triple
whammy of a sovereign bond sell-off, a
plethora of country-specific risks (not least
Greece) and an anticipated tightening in US
monetary policy," he said.
Analysts say that central European coun-
tries were especially vulnerable to the sell-
off in German Bunds as their markets are
closely correlated to price action in the euro
There s also the Greece factor, with turmoil
there likely to hurt the outlook for the euro
zone and the emerging markets with which
it has close economic and trade links.
"Clearly Greece is the big unknown at
the moment. Contagion from that would
probably be concentrated in parts of eastern
Europe, which have the closest linkages to
the euro zone," Capital Economics senior
emerging markets Economist William Jack-
son told CNBC.
Greece on Friday delayed a loan repayment
to the International Monetary Fund and a
deputy minister said the government could
call a snap election if its creditors do not
soften a compromise deal that could unlock
much needed aid.
A Greek bailout program expires at the
end of June and if a cash-for-reforms deal
is not reached by then, analysts expect then
the risk of a default to rise sharply, raising
the prospect of the country s exit from the
"The real risk is that weaker growth in
the euro zone and problems in the banking
sector hurt parts of central and Eastern
Europe," Jackson said, referring to the impact
Greece would have on emerging markets.
Don't forget the Fed
Although markets have scaled back expec-
tations for the timing of a rise in US interest
rates from June to later this year, the prospect
of monetary tightening in the world s biggest
economy remain a key risk for emerging
markets, analysts said.
In a note on Friday, Mark Mobius, an
emerging markets fund manager at Franklin
Templeton Investments, said it seemed likely
that the Federal Reserve was in no rush to
"Nonetheless, the markets will likely react
when the Fed does act, so we are remaining
cautious, and planning for some volatility
ahead," he wrote.
In fact, until the outlook for US rates
becomes clearer, markets generally will be
in for greater volatility, said Joe Zidle, port-
folio strategist at Richard Bernstein Advi-
"We ll have volatility until we get stronger-
than-expected data that tells people the Fed
is going to hike more quickly or weaker data
that suggests the Fed will be hold," he told
Jackson at Capital Economics said Turkey
and South Africa were two emerging markets
to watch most closely in terms of further
Turkish assets have faced additional pres-
sure from uncertainty ahead of a weekend
election that could force the ruling AK party
to form a coalition. The Turkish lira traded
at about 2.66 per dollar on Friday, holding
near one-month lows.
"On every single measure of vulnerability
you can look at, Turkey usually comes near
the top," said Jackson. CNBC
What the bond rout means
for emerging markets
The US stock market is long overdue for a big fall.
It has been 925 trading days since the stock market
had a correction, according to a recent Deutsche Bank
(DB) report. That s more than double the average length
of time it usually takes.
A correction is a 10 per cent or greater decline in
the stock market in a short period of time. The average
rally period without a correction is 357 trading days,
according to a Deutsche Bank analysis of stock market
moves since the 1950s.
The Deutsche Bank strategists aren t quite ready to
say a correction is imminent, but they add their voices
to those saying: Beware!
"We believe the probability of a five per cent plus
dip is high this summer," the report by chief US equity
strategist David Bianco says.
Stocks look very pricey, the report warns, especially
given signs that American economic growth isn t pick-
ing up in 2015 as many had hoped. On top of that,
corporate sales and earnings have been disappoint-
ing.What to watch for: Bianco points to three possible
sell-off triggers: the Federal Reserve botching the
timing of the first rate hike, the US dollar getting too
strong and the bond market---especially the US 10-
year yield---rising too fast.
The Fed s efforts to keep interest rates at historic
lows in order to boost economic growth may be back-
"We know central banks want to be supportive of
markets and confidence, but this has its risks now
especially in the US," the report cautions.
The current rally is the third-longest without a cor-
rection. The mid-1990s had an even longer stretch of
seven years before there was a 10 per cent correction.
That rally finally ended in October 1997 after a
"mini-crash" in Asia sparked a sell-off around the
Since over three and a half years have passed without
a correction greater than 10 per cent again, Deutsche
Bank advises re-examining your portfolio.
The solution isn t to exit stocks. Instead, look for
opportunities to buy during the dips. Stocks often go
up after a correction. It doesn t mean the bull market
To avoid volatility, the researchers recommend steer-
ing away from "consumer companies (with) tired
brands or facing tough competition" and "commodity
and industrial capital goods producers."
Stock market rallies don t just die of old age, but
history is a valuable guide, and it suggests a correction
may be coming sooner rather than later.
The stock market
is long overdue for
a big drop
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