Flash Note 24/06/2016 Some thoughts on Emerging Markets

Flash Note
24/06/2016
Alex Fusté
@AlexfusteAlex
[email protected]
Some thoughts on Emerging Markets
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Following the initial shock of the Brexit vote, I perceive some
early signs that the financial markets in EM have started to
stabilize.
The Mexican peso is the most heavily traded EM currency
and a bellwether for investor sentiment – it sold off heavily
from 18.2 to 19.5 in the initial aftermath of the vote, but has
since recovered some lost ground to 18.8.
My sources in C. Economics have pointed that there has so
far been few signs of stress in EM banking systems.
Interbank interest rates in most of the EMs that publish daily
fixings have either been stable (Poland, Turkey, Hungary,
Czech Republic and Taiwan).
In the same way, I thinks that this might continue to be the
case is that central banks in the developed world have
plenty of ammunition in the event that global credit markets
do freeze up. The Bank of England has already begun to talk
about liquidity injections. Other central banks in the
developed world (notably the ECB) could step up policy
support too.
All of this should help to calm the mood in financial markets
and ultimately limit capital flight from EMs. If this is not the
case and there is widespread flight from EMs, then the
markets with larger external financing requirements (notably
Turkey and South Africa) will be the most affected (since
they will forced to raise interest rates, negatively impacting
both bonds and equities).
What are the wildcards to watch for? The first is signs of
stress in global banking systems. The weakest link is banks
that rely heavily on external wholesale markets (with higher
short-term external debt). On this measure, banks in CEE,
Turkey, South Africa and Malaysia look exposed.
Regards,
Alex Fusté
Chief Economist
Andbank
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