This is not just about the Fed’s tapering plans. Worries about China are mounting and tied to the risk that it could have its own Lehman Moment.
While the PBOC has adopted a more soothing approach to liquidity management before the Lunar New Year, concerns remain over a possible ICBC wealth management product default on January 31.
But China will likely deal with the situation by organising an investor bailout and making full payment on the sourced high-yield trust investment. At the same time, the Fed will be able to deliver another smooth US$10bn taper.
Still, successfully navigating next week’s FOMC/China event risks will not convince investors that the EM world is once again safe enough to pick up value from those with sound fundamentals. The current environment is about adjusting portfolios to:
1) persistent concerns as to whether China can smoothly deleverage its financial sector and
2) sentiment turning towards the timing of the first rate hike as QE draws closer to its eventual end.
There are very few reasons to buy at this stage, and those EM FX with c/a deficits and low FX reserves remain most vulnerable. At the top of the vulnerability list – and source of potential contagion – remains the TRY where political constraints on the CBRT and dwindling FX reserves suggest an uphill battle in stemming the sharp loss of confidence.
