Life in the Financial Markets by Daniel Lacalle

Life in the Financial Markets by Daniel Lacalle

Author:Daniel Lacalle [Lacalle, Daniel]
Language: eng
Format: epub, pdf
ISBN: 9781118914960
Published: 2014-11-24T00:00:00+00:00


The impact of quantitative easing in emerging markets

With cheap money created by the US Federal Reserve, we also see big volatility in dollar-based economies.

The risk in emerging markets is not only lower than expected growth in Brazil, Mexico, India or China. The big dilemma is what markets call “a sudden stop”: an abrupt disruption in the flow of capital investment.

One of the consequences of monetary stimulus in recent years has been extreme inflation in risky assets. The US exports inflation to semi-dollar-based economies and emerging markets, and some of the favourite investments throughout QE times have been emerging market bonds. So much so that we have seen very low-quality bond issuers access the market at extremely low rates.

With the prospect of the Federal Reserve reducing its stimulus in May 2014, markets saw a wave of unprecedented withdrawal of capital, particularly from emerging markets.

The reserves of the central banks of emerging countries lost $81 billion, but financing needs increased by 7% and current account deficits were giving alarm signals.

Excessive inflation and the collapse of local currencies made current account deficits soar in Latin American countries.

The access to cheap credit and dollars and easy money created excessive liquidity for emerging economies, around $10 billion per month, according to the estimates of several investment banks. And this excessive liquidity had become a new norm. Unfortunately, periods of excess liquidity were not used to reduce risk and strengthen economies but are assumed to be new paradigms of normality… until the tide turns.



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