Investors began to flee positions in emerging markets over the last week or two as concerns of slower growth and uncertainty surrounding Federal Reserve policy spread around the world.
Argentina appears to be standing at the precipice of a currency crisis, as the Peso declined 12% on January 23rd alone, the sharpest drop since its infamous devaluation and economic crisis in 2002. China’s growth has slowed and analysts are worrying more and more about its vast shadow-banking sector that has fueled an enormous credit boom over the last five years. Slow growth in Brazil, unrest in Ukraine, and further currency troubles in Turkey and South Africa (among others) all contributed to a rout for emerging markets (EM) as the first month of 2014 came to a close.
While the exact causes of investor nervousness in regards to EM countries are both unclear and multiple, the U.S. Federal Reserve’s “tapering” policy – its plan to gradually reduce the billions of dollars in monthly bond purchases – may have contributed to international investors pulling their money out of riskier bets in developing countries.
By curtailing bond-purchasing, the Fed will make the U.S. Dollar relatively more attractive as interest rates climb, incentivizing money to flow out from foreign currencies and back into the Dollar. The Fed’s policy is hardly sudden or acute (thus it’s nickname “tapering”), but it may be an example of learning…