Keith Mullin, IFR Editor at Large
the Fed will taper taking on extraordinary but – dare I say it? – somewhat monotonous proportions?
I know it’s important stuff and the summer spike in 10-year Treasury yields has been remarkable blah blah blah but the sheer amount of nervous chatter around it strikes me as a little overdone.
Given the lack of new insight in the latest minutes into the Fed’s already articulated intentions to curtail monthly bond purchases only if it expects the economy to perform as expected … if you get my drift … you’ve got to wonder whether the continued rout in EM bonds, equities and currencies is a tad over-cooked.
After all, the tapering story is hardly new so the ‘dump all non-core positions and run for the hills’ approach and the perceived disorder it’s wreaking seems, well, unnecessary. I’ve haven’t seen how much volume is going through the numbers; I suspect they’re on the thin side so the price impact is exaggerated.
Nevertheless, the Indian rupee and Turkish lira marked at record lows against the dollar; Indonesian rupiah at a four-year low; Thai baht and Malaysian ringgit at three-year lows; Brazil, South Africa, Russia, Ukraine all hit; and indications that the Mexican peso and Korean won are being targeted despite their better fundamentals? Surely an exaggeration.
People never seem to learn that trying to get out before the stampede in a classic herd environment is by definition the stampede. The fear that if you’re not first out you’ll be crushed before you get to the exit seems to subvert rational thinking. I’ve got to say the way this saga has developed is more than a little reminiscent of classic old-school leveraged fast-money renegades and gunslingers slashing and burning because they can.
OK fair’s fair: some countries do look vulnerable on macro fundamentals, particularly those more dependent on foreign capital inflows to finance current account deficits. But doesn’t the very act of tapering mean by definition that the Fed thinks the US economy is sufficiently robust to stand on its own two feet? Is that message and its beneficial impact on EM exports, for example, getting lost in the cacophony?
No crisis situation
People assure me we’re in neither an Asia 1997 crisis situation nor a 1994 scenario – when a 25bp hike in the Fed Funds rate in February of that year to 3.25% was followed by six subsequent hikes in the following 12 months to 6% at the same time as the discount rate went up from by 225bp to 5.25% between May 1994 and Feb 1995. That initial 1994 action completely caught the market off-guard and sent global fixed-income markets into freefall and pretty much shut the capital markets.
This time around, the Fed’s telling us it’ll keep a lid on the short end, will let the curve steepen and will do what it can to keep things orderly. Of course, the latter is not in the Fed’s gift. That notwithstanding, I smell an opportunity to take advantage of an overshoot in EM selling.
I’d do my homework and put some robust screens (debt/GDP; FX reserves, net financing needs and financing sensitivity to higher rates, policy sustainability; growth prospects, etc.) in front of any action but I’d be willing to buy baskets of options on whatever gets through. After all, this is not Armageddon. Is it?