Alongside the renewed fall in equities, EMs and especially EM currencies have been taking it on the chin. With western markets seizing up and oil prices tumbling it is a double whammy for emerging markets. EMs are hurt by declines in oil, but are doubly wounded by the risk-off mood that is pervading markets. Treasuries have seen big yield declines as investors flooded in, and that has meant outflows from EMs, which have seen their currencies drop considerably. The Rand and Lira have been hurt most.
FINSUM: This ship probably won’t be righted until western markets exercise their demons.
Markets have been worryingly calm over the last month, at least according to a slew of new stories. Fears of “complacency” and too much confidence in the Yellen Put have been driving headlines, and while some may think there is no reason to worry, this article presents several charts showing just how oddly still the market has been recently. The piece has charts on stock, FX, EM, and Treasury volatility, as well as on volumes and price ranges.
FINSUM: We too think markets have been worryingly calm. However, we also think there is too much consternation about it, probably because of what happened last August.
In another sign of a phenomenon seemingly occurring in many markets, liquidity in the world’s largest market—foreign exchange—is reportedly drying up. While core currencies, like the Euro, Yen, and Sterling crosses don’t seem to be hit, those a little further down the latter like the Australian Dollar, New Zealand Dollar, Swiss Franc, and Swedish Krona are seeing drops in liquidity. “The markets are significantly less liquid now than they were before the financial crisis”, says a London based fund manager. Spreads have reportedly widened and “pockets’ of liquidity have started to occur, rather than the broad-based 24-hr liquidity previously seen. According to one commentator, markets “were over-liquefied” for the last couple of years as banks offered huge liquidity in an effort to gain market share. However, than strategy has now receded, which has left a void.
FINSUM: This is an interesting article about the changes occurring in FX. Something to be aware of if you are involved in the space or use FX markets for hedging.
The fallout from the Swiss Franc debacle of last week is starting to become clear. Several FX brokers, especially in the UK and New Zealand, have closed because of losses; Citigroup—the world’s largest FX dealer—has lost $150m; and a major Miami-based hedge fund, Everest Capital, lost all $830m in its flagship fund. The hedge fund, headed by founder Marko Dimitrijevic, apparently lost the entire value of its leading Everest Capital Global fund. The losses leave the hedge fund with $2.2 bn in its other funds. The fund had been open for 24 years, and had successfully navigated five debt crises. Recently, the fund had profited from shorting the Franc on the back of a failed vote to tax banks in the country. Several other funds, including the John Hancock Absolute Currency Return Fund (JCURX), have seen extensive losses as well.
FINSUM: The full magnitude of losses is only starting to show its ugly head this week. Let’s see what happens at the end of the quarter when more funds publish their performance.
Twenty years ago Mexico suffered a massive currency crisis, with the country’s Peso losing 50% of its value. While that is not likely to occur in the immediate term, the country is still facing a growing number of pressures and its currency is hurting, just like its budget. In the face of a steady decline in value to 14.5 Pesos per Dollar, the Mexican central bank announced last week that it would start a programme to auction $200m on days when the Peso fell 1.5% or more. The country is in trouble because of a swollen budget that was running a 4% deficit even when oil prices were at $100/barrel. The country earns a third of all its revenue from oil, and while they have successfully hedged prices for a quarter of their output at $76, they are still heavily reliant on oil sales. Production has declined and with prices now at $57/barrel, the country will earn half or less of the total revenue that it did when oil was $100. Economists seeing Mexico growing at only 2.0% next year.
FINSUM: Mexico looks headed for trouble as their budget deficit seems likely to rise and the Peso appears ripe for devaluation. Those holding Mexican assets look out.