CNBC Comment: Don’t blame the Fed for sentiment swing
WHAT is the difference between the global economy on the last day of 2013 and the first day of 2014? Absolutely nothing. And yet if you look at financial markets, you’d think that something dramatic had happened to send sentiment diving off a cliff after 1 January. What happened to the glorious 2013 rally, accompanied by a Great Rotation back into equities and away from the sovereign fixed-income market?
All the reasons we are supposedly selling off emerging markets (EM) now were in place for pretty much all of 2013. And it’s not as if we ignored them. I’ve lost count of how many times I put up the 12 month comparison chart of the MSCI Emerging Markets index versus the S&P 500 last year. It showed a huge out-performance for the US benchmark throughout – based on the fact that no-one had much faith in emerging markets broadly, and even less faith in the respective governments to rein in current account deficits and to carry out much-needed structural reforms in former darlings such as India and Brazil.
Hmm, say the emerging world policymakers. We need a scapegoat. How about the Americans again? It’s that dastardly tapering that’s to blame.
When I hear the much-respected Reserve Bank of India governor Raghuram Rajan bemoaning the lack of coordination globally for the wave of volatility hitting EM, I think a very large pinch of salt is needed. What does he expect from the Americans, whose economy is apparently growing at an annualised 3.2 per cent with a headline unemployment rate of circa 7 per cent? Coordination would be nice, but it’s a fantasy.
The last time we got global coordination right was at the peak of the financial crisis, when $1.1 trillion was promised to pump up the system. Since then, it’s been every man for himself, as Europe, China and the US see their economic cycles continue to diverge. And weren’t EM finance ministers banging on about the hot money ills of QE? Now it’s being withdrawn, they’re at it again.
The hedge funds are getting bearish on EM, says Societe Generale’s Benoit Anne. But he reckons there’s a danger of short positions getting overstretched. The next phase, however, is the interesting one. If turmoil starts hitting developed economy fundamentals, rather than just financial markets, stronger policy responses will inevitably follow.
Amid all this volatility and sentiment swings, it’s worth reminding ourselves that we still have some pretty atrocious economic fundamentals in Europe. Yes, we’ve seen a slight improvement in the data. But if nothing else, the EM crisis in confidence should teach us not to be smug. It could be us next.
Steve Sedgwick is anchor of SquawkBoxEurope on CNBC.