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MACRO VIEW COLUMNS: Emerging Market Bearishness Can Come at You Fast

(Bloomberg) — Emerging-market assets may be suddenly hit on multiple fronts at once.

  • One of the core themes of 2017 has been the resilience of EM. And it’s precisely because of its solid and steady performance all year that pain can intensify so quickly. Complacent longs might soon be questioning what happened
  • Between the Fed’s plan to reduce the balance sheet and the dollar’s nascent rebound, the environment is suddenly looking more difficult for EM. But similar macro concerns have been brushed off many times this year. The difference this time is that those macro pressures are being combined with a broad array of idiosyncratic negatives
  • Asia will suffer due to a trifecta of rising oil prices, weakening tech stocks and a North Korean problem that appears to be intensifying by the week. That will be compounded by extended holidays in several of the region’s major markets — China, South Korea and Taiwan. And a fear that the Xi Jinping “put” on economic growth in China may expire after the Communist Party Congress in mid-October
  • Eastern Europe will be vulnerable to some retrenchment amid political tensions in both Germany and Spain. Greater integration, and hence convergence trades, will be on the back-burner for a few weeks
  • As a major energy importer, Turkey is getting hit by the double-whammy of the geopolitical pressure from the Kurdish independence referendum and the related spike in oil prices
  • South Africa, with by far the most liquid financial markets on the continent, is seeing a sharp terms-of-trade deterioration, due to lower metals prices but higher energy costs. That’s dangerous for a country with a large current-account deficit, minimal growth, high unemployment and a volatile currency
  • Latin America will feel the pinch from weaker metals, but also suffer a deleveraging blow from yet another U.S. domestic policy failure
  • From all sides, EM is likely to start feeling the pressure. And as long-time EM traders know well, sometimes the liquidity you saw on the way in just isn’t there on the way out
  • NOTE: Mark Cudmore is a macro strategist who writes for Bloomberg. The observations he makes are his own and are not intended as investment advice

To contact the reporter on this story: Mark Cudmore in Singapore at mcudmore8@bloomberg.net To contact the editors responsible for this story: Madeleine Lim at mlim131@bloomberg.net Nick Gentle, Tomoko Yamazaki

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