Global markets in May experienced the continuation of the pressure being felt by emerging markets (EMs) as the US Dollar strengthened and US 10-year yields crossed the 3% mark, with the Federal Reserve certain to hike rates in June. Many emerging market currencies weakened significantly against the dollar. Argentina, Turkey and Indonesia were among the most affected. Indonesia avoided the worst of it by proactively hiking interest rates, while Argentina negotiated a $50bn standby facility with the IMF. However, Turkey’s rate hikes were a delayed response thanks to political interference in the central bank.
Net foreign portfolio flows to emerging markets continued to be negative in May, following on from April, with $12.3bn in net outflows from the EMs monitored by the Institute of International Finance (IIF). However, the IIF is keen to point out that a broader measure of foreign investor sentiment – which includes capital investment in property, factories or other assets – is more encouraging for emerging markets investors. Accordingly, net capital flows into EMs of $32 billion in April was well above the 2017 average inflows of $7 billion a month.
The month came to an end with concerns about Italy due to its continuing political issues. The prospect of a euro-skeptic, populist governing alliance in Italy spooked investors about the likelihood of another Eurozone crisis, causing a short-lived risk off sentiment in global financial markets. Those concerns have tapered off since then, but the situation has raised the question about the financial impact of the end of monetary policy easing on countries like Italy which struggle from high indebtedness.
Trade related tensions continued to simmer, with President Trump criticizing the outcomes of negotiations with China and re-imposing steel and aluminum related tariffs on the EU and Canada. This has again raised the possibility of a spiral of retaliatory tariffs, impacting global growth. In such a scenario, most analysts think the US Dollar will weaken, like during previous bouts of US protectionism. But a contrarian view is that it could make US growth -and thereby US assets – standout relative to the rest, putting emerging market currencies under pressure.
Brent crude oil prices moved within the $70 to $80 range through the month, with prices reaching a high of $79.80 a barrel on the 23rd of May. This was driven by concerns over supply reductions following the US announcement of re-imposing sanctions on Iran and the reducing supplies from crisis-ridden Venezuela. However, prices moderated slightly in the latter part of the month with Saudi Arabia and Russia pushing the OPEC-led group of oil producers to increase output to offset these supply reductions.
Source: Frontier Blog