Week End Blog – From Bad to Worst!

Welcome back to the Week End Blog. During my holiday, things seem to have gone from bad to worst. Especially the situation in emerging markets is worrisome The IMF made a strong statement this week, emphasizing the potential danger of higher interest rates for emerging countries. The massive build up of (foreign) debt would seriously impact the financial health of these countries. That vocal warning of the IMF raises at least one question, however. T0 what extent would a delay in raising the Fed target rate help emerging markets? First, their growth outlook is far from exuberant and is unlikely to improve much next year. Second, debt levels are likely to rise further, making the potential impact of higher rates even bigger. How to put this ‘ monster’ back in the box?

Brazil is perhaps the IMF’s base case country when it come to vulnerability to higher borrowing cost. Brazil has ramped up foreign debt swiftly the last three years, while its currency has lost 50% its value over that same period . You don’t have to be a mathematician to figure out this causes some problems.

As mentioned, Brazil is probably the ultimate example of this ‘higher debt – lower FX’  dynamics. But it’s certainly not alone. Many emerging currencies have massively depreciated. This depreciation has dragged down an entire asset class, emerging market debt.

Meanwhile, all eyes are on China, as the country is seen by many as the root of all troubles. After a series of financial market-related measures China took some additional more economic measures this week. The government reduced the minimum home down payment for first-time buyers and cut the tax on auto purchases. The Hang Seng Index climbed 3% on the news, but remains down almost 9% for the year.

This week also saw the return of deflation in the Eurozone. The CPI Flash estimate for September came in at -0.1%, below expectations. Core was steady at 0.9% YoY, as energy prices pull down the headline number. Still it’s deflation. Add to that the 2.6% fall in the PPI and you’ll have your answer why everybody is so obsessed with inflation.

Although the ECB has stressed before that there is no holy grail in measuring inflation expectations, one indicator, that is thought to have at least some usefulness, is falling of a cliff. The German 5-year 5-year forward breakeven rate fell to the lowest level since 2011, recently.

And then, the US jobs, also pretty bad. In September just 142K were created, way below the expected level of 201K. But equally bad, the revision for August. Last month’s number was revised down severely from 173K to 136K. Not a good week for jobs.

But should we really trust these numbers? ‘ Yes’, Chinese macro numbers should be taken with a grain of salt, but what about the Case Shiller Home Price Index? Since February of this year, the year-on-year rise in US house prices in the 20 metro areas come in between 4.90% and 4.96%. That is pretty awkward, now is it?

Time to move over to the ‘worst’ part of this blog. Helped by the, very respectable, Volkswagen, the German DAX Index recorded its worst 2-month return since 2010. During August and September German stocks lost more than 15% of their value, which is, by any standard, pretty bad.

And what to think of metals and mining companies? They have been going down for five consecutive calendar months. Over that time stocks plummeted by almost 40%. Only the six-month carnage in 2008, in the run up to Lehman, did metals and mining companies perform worse. To read more on the mining meltdown, please click here.

Two more ‘ worst’ graphs to go. First, equity markets. The Peruvian stock market, measured in local currency, has shed 32% of its value in the first three quarters in this year. With that percentage it’s convincingly the biggest loser of the year, so far. But less obscure markets like China’s Hang Seng Index and the Jakarta’s Composite Index have also caused quite some headaches with losses of 19% and 17% respectively.

In currency markets things look even worse. Especially currencies of African and former Soviet Union countries have been hammered. The Zambian kwacha was down 46% at the end of Q3, followed by the Belarusian Ruble (-38%) and Kazakhstan Tenge (-33%). But, as with equities, a couple of the bigger emerging countries have seen their currency slump, as well. The Brazilian real and the Turkish lira also made it to the list of the world’s worst currencies.

I will end this week’s Week End Blog on a positive note, however. Because, when everyone starts talking about the worst, the worst is usually (NOT ALWAYS!) behind us. We have survived September, let’s get ready for October. Enjoy your weekend!

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