Time For Another Asian Crisis

photo courtesy of Ms Jeannie Tan, wildlife photographer, SF.


Emerging market funds have seen record breaking weekly inflows for the month of July led by hard currency funds and their ETFs.

“Emerging markets are rapidly becoming the number one trade for 2016. Both emerging market equity and debt funds have seen record inflows during the past few weeks, and the MSCI Emerging Markets Index is up by around 25% since the January lows, outpacing the S&P 500 by 8.7% over the same period.” http://www.valuewalk.com/2016/07/emerging-markets/


Time For Another Asian Crisis


Should we worry ? Especially when analysts are just as puzzled and we have not come across too many naysayers which may be temporarily comforting just as the Chinese Yuan fixing has been tamed below the 6.7 mark this month that has been recording breaking for the S&P 500 after a superb rebound in US economic data and cementing the outlook for a rate hike in the near future. A big shame that the entire episode had to be punctuated with the stream of terrorism related incidents around the world.

The Citi US Economic Surprise Index is at a 18 month high, past the bad news of Brexit, and the followed by a month of expectation-beating economic data out of developed markets.

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Indeed, compared to 3 months ago, Major Economies have outperformed Asia, Emerging Markets, BRICS, CEEMA, Latin America to name them all.

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The major economies are outperforming but EM is reaping the benefits of the twin bazookas of the ECB and BoJ as it has been widely acknowledged, and not from their merits at home which indeed, would not be surprising given the hullabaloo over 1MDB everywhere except in Malaysia, but because EM is the immediate short term solution to their negative rate problems at home.

It does go against the grain of the original motive of QE which is to stimulate bank lending and corporate expansion to achieve the twin goals of employment and inflation. All we are seeing is competitive currency devaluations as a result.

The questions pile as we head into the US Presidential campaigns now that the candidates are formally selected, the Fed rate hikes to come, the Jackson Hole annual economic symposium next month along with the high risk Olympic Games.

As Malaysia goes under the US AG’s magnifying glass, we have the Ringgit hit a 2 month high in July because the US AG department is going to return the money to the Malaysian people  instead of the “high level officials”? https://www.justice.gov/opa/pr/united-states-seeks-recover-more-1-billion-obtained-corruption-involving-malaysian-sovereign

Case closed because the US cannot indict a Non US leader of state and Malaysia has always been politically aligned to the US.

Would Erdogan get away with incarcerating tens of thousands of his own citizens when his atrocities only attract global sympathy (but no help) along with the the Turkish stock and bond markets following the coup attempt ?

Emerging markets have not changed and the outlook remains doleful but folks are choosing to ignore the signs in their urgency to milk the most of BoJ and ECB’s largesse, although “milk” is hardly a good word to describe the need to escape from negative interest rates.

The outlook for Asia is not about the growth because Asian growth remains highest in the world nor is it about low inflation or aging populations but rather, it is about the rot in the financial markets that has not restructured to address imbalances in the good times and is now back to haunt us when we need it least.

Nomura’s early warning indicators (EWIs) that measure 1. Private credit to GDP ratio, 2. Debt Service ratio, 3. Real effective exchange rate and real property and equity prices, are now signaling that Asia is the region in the world most at risk, that a financial crisis could strike Asia at any time, and the signals are at their highest point since the 1997 Asian crisis.

Countries at stake rank highest in China and Hong Kong but the 5 Asean countries of Indonesia, Malaysia, Singapore, Philippines and Thailand are also at their riskiest since 1997.

Besides blaming China for their slowdown, most of the blame lies in the cheap credit which has led to the misallocated investments, evidenced in the 3 bond defaults in Singapore this year.


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The visual depiction, courtesy of Nomura, bears a sea of alarming red in EM Asia and folks around may be excited to consider SGDMYR back above 3.10 again in preparation for the troubles ahead.

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copyright EZFX and reproduced with permission.