South African rand leads emerging market rout
June 2nd, 2013
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South Africa‚Äôs rand punched through the psychological barrier of 10 to the dollar as investors flee countries with big current account deficits, deemed most at risk. The country‚Äôs central bank said it would take action to stem the fall in the rand if moves became ‚Äúabrupt and disorderly‚ÄĚ.
The Johannesburg Stock Exchange says foreigners have withdrawn ‚ā¨1.1bn (¬£940m) from South African bonds over the past 10 days. The Turkish lira fell to the lowest in 17 months against the dollar, though it has just been upgraded to ‚Äúinvestment‚ÄĚ quality by Moody‚Äôs. The Thai baht fell to a one-year low, a pattern seen in much of emerging Asia.
Bond yields have spiked sharply in Turkey, South Africa, Mexico and Hungary, rippling through down corporate spreads. Yields on 10-year Polish bonds have jumped 60 basis points to 3.60pc in May as even the strongest are drawn into the turmoil. ‚ÄúThis is the end of the bull market,‚ÄĚ said Benoit Anne from Societe Generale. ‚ÄúI am now throwing in the towel. We are out of virtually all our emerging market bonds.‚ÄĚ
Mr Anne said hedge funds have already taken profits but ‚Äúreal-money‚ÄĚ institutions have yet to follow. ‚ÄúWe have seen some selling, but nothing that looks like capitulation yet. When and if this kicks off, it will fuel another massive wave of correction.‚ÄĚ HSBC said last week that it was retreating from emerging debt, parking 42pc of its tactical portfolio in US Treasuries.
Bartosz Pawlowski from BNP Paribas said the latest ructions are driven by exaggerated fears of Fed tightening. ‚ÄúEven if the Fed tapers bond purchases by $20bn [¬£13.2bn] a month, it is still adding stimulus, as is the Bank of Japan, so it is not that deadly. But foreign investors have been badly burned this month, and when things get hairy in emerging markets, everything gets hit.‚ÄĚ
Outflows so far have been a tiny fraction of $8 trillion stock of foreign capital in emerging markets. The concern is that the sums are now so huge and the economies so big that an exodus could have systemic effects for the world. ‚ÄúIf something goes really wrong in one of these behemoths, it could create a chain reaction,‚ÄĚ said Mr Pawlowski.
The sell-off has yet to hit emerging market equities with full force, though India‚Äôs Sensex fell 2.3pc on Friday after growth slid to 4.8pc in the first quarter.
Stephen Jen from SLJ Macro Partners said South Africa is the ‚Äúcanary in the coal mine‚ÄĚ, the first to break after a global resource boom and an emerging market investment bubble.
The World Bank warned this week that the economy could contract ‚Äúsubstantially‚ÄĚ if labour disputes escalate and the country fails to tackle its electricity crisis. A third of South Africa‚Äôs platinum mines are operating below marginal costs.
The country has a current account deficit of 6.5pc of GDP and the picture is deteriorating as commodity prices slide.
Analysts say Turkey is also skating on thin ice with a deficit near 7pc. ‚ÄúWe think it may be the most vulnerable of all,‚ÄĚ said one City bank.
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Contributed by Ambrose Evans-Pritchard of The Telegraph.
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