Pain for the emerging markets refuses to go away

Comments of concern around global growth from the Organisation for Economic Co-operation and Development (OECD) motivated markets to begin the new trading week under selling momentum. The OECD cut their global growth forecasts and repeated their concerns over the global economy, with ongoing sluggish growth in Europe now being joined by weaker growth in the emerging markets.

The resumption in optimism that the Federal Reserve might finally begin raising US interest rates in December is another likely reason why the global equity markets were volatile yesterday. However it is hard to ignore the concerns over global growth at a time where commodity prices remain depressed, the pace of economic recovery in both Europe and Japan is under continuous question and fears over China persist.

Speaking of China, anxiety over repeated slowing economic momentum has stretched even further following both weak trade figures over the weekend and a decline in inflation early this morning. Both of these results are going to place further pressure on the People’s Bank of China (PBoC) to unleash further monetary easing, and I still think it is possible for interest rates to be cut at least one more time before the end of the year. Economic growth in China is expected to fall even further next year, meaning that the pressure on the PBoC to continue easing monetary policy will be continuous.

Emerging markets remain under pressure

Momentum for the emerging markets remains weak and vulnerable to declines with investor sentiment being continually pressured by consistent speculation over a US interest rate rise, depressed commodity prices and elevated anxiety around China entering a deep economic downturn. Due to many of the emerging markets being reliant on commodity exports, they are feeling the most pressure from depressed commodity markets while economic momentum continually declining in China is also further impacting on investor attraction.

While many headlines are focusing on the China economy slowing down, what is important to understand is that reduced growth in China is no problem for the economy itself but for those economies that are reliant on export demand to China. Those who are the most vulnerable to headwinds from China include many of the emerging markets and this is why it is very unlikely that the emerging markets will be able to recover momentum. It was only around two weeks ago that the IMF downgraded their economic growth forecasts for the sub-saharan African region due to the China slowdown, which goes some way towards validating how vulnerable the emerging markets are to slowing China demand.

The Malaysian Ringgit has fallen victim to the poor sentiment towards the emerging markets and is currently receiving punishment towards the Dollar. The USDMYR is close to approaching 4.40 and if the selling in WTI or commodity markets extends, the currency is going to find itself at risk to recording another milestone low against the Dollar. The resumption of punishment towards the Ringgit is not reflective of the robust trade data that was released on Friday, however its inability to recover momentum is a reason why I think the Bank Negara will find themselves under pressure to raise interest rates and strengthen the currency.

Both the Indonesian Rupiah and Jakarta Stock Exchange Composite have commenced the week to weakness. The decline in the Jakarta Stock Exchange Composite Index is likely due to a combination of an overall weak sentiment towards the emerging markets and the GDP report late last week coming in slightly below expectations. The reports around a sharp drop in Bank Indonesia’s foreign-exchange reserves last month is going to weaken optimism that the rebound in the currency was due to improved confidence over the government economic stimulus packages, because it shows that the central bank have spent money to maintain the recovery of the Rupiah.

WTI records monthly low

WTI Oil has fallen to its lowest level in November at $43.62 and with the repeated anxieties over an oversupply continually making buyers hesitant, we could still meet the two-month low last seen in late October at $42.58. Although there is an OPEC meeting scheduled for December, the recent reports of increased production in Saudi Arabia and Russia make it difficult to expect a production cut before the end of the year.

Follow Jameel on Twitter @Jameel_FXTM.

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