Some would call it a coincidence. That during Fed chief Ben Bernanke’s last FOMC meeting, two other central banks - Turkey (TRY=X) and South Africa - have taken aggressive steps to protect their markets and money.
The problem is, the intent of their rate hikes didn’t last long.
“What’s more telling is that the market is calling their bluff on both central banks right now,” says David Lutz, the head of ETF trading at Stifel Nicolaus in the attached video. “This has the making of a perfect storm.”
And it’s not just those two countries. Lutz says so far in 2014 we’ve had seven central banks act to shore up their currencies against what he calls a “triple whammy” of headwinds. Specifically, he says emerging markets (EEM) are getting squeezed by rising rates, falling commodity prices, and political instability and currency weakness in places like Thailand, Indonesia, India and Brazil.
“We’ve had so much momentum here in the developed markets that we’ve got to look for the boogieman elsewhere,” he says, adding that the Brazilian Real will likely be the next battle line to watch.
If he’s right, Lutz says Brazil will be “the last shoe to drop” before we start seeing contagion and major problems spreading here and to other developed markets.
For many, all of this sudden attention on small foreign economies and currencies makes no sense.
“When we had rates artificially low for a long time, capital globally was trying to find a home and it went seeking yield in these emerging markets,” Lutz explains. “And now that all of a sudden we’ve got tapering going on, we’re starting to see rates here and globally popping up and that’s making emerging markets a lot less attractive.”
And that’s where the contagion and interconnectedness of global markets comes in to play, he says, and why investors everywhere have once again found themselves tuned in to the Fed for relief.
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