Bernanke Put for emerging markets? Not really

September 23, 2013

The Fed’s unexpectedly dovish position last week has sparked a rally in emerging markets — not only did the U.S. central bank’s all-powerful boss Ben Bernanke keep his $85 billion-a-month money printing programme in place, he also mentioned emerging markets in his post-meeting news conference, noting the potential impact of Fed policy on the developing world. All that, along with the likelihood of the dovish Janet Yellen succeeding Bernanke was described by Commerzbank analysts as “a triple whammy for EM.” A positive triple whammy, presumably.

Now it may be going too far to conclude there is some kind of Bernanke Put for emerging markets of the sort the U.S. stock market is said to enjoy — the assumption, dating back to Alan Greenspan’s days, that things cant go too wrong for markets because the Fed boss will wade in with lower rates to right things. But the fact remains that global pressure on the Fed has been mounting to avoid any kind of violent disruption to the flow of cheap money — remember the cacophony at this month’s G20 summit? Second, the spike in U.S. yields may have been the main motivation for standing pat but the Treasury selloff was at least partly driven by emerging central banks which have needed to dip into their reserve stash to defend their own currencies. According to IMF estimates, developing countries hold some $3.5 trillion worth of Treasuries, of which just under half is in China. (See here for my colleague Mike Dolan’s June 12 article on the EM-Fed linkages)

David Spegel, head of emerging debt at ING Bank in New York says the decision reflects “an appreciation for today’s globalised world”:

A lot of political pressure came to bear on them globally. A few weeks ago Bernanke said the Fed was  more concerned about the U.S. (economy) but when rates went up it became clear that we live in a globalised economy and the Fed needs to take into account the impact of its decisions on the rest of the world. That’s my take on their decision.     

That doesn’t mean emerging markets’ problems are over — as Spegel notes, the Fed will stop its bond-buying eventually no matter what happens to emerging markets. What the decision does is gives the developing world some more time to prepare. Some are doing so by issuing bonds to raise cheap cash and others are putting in place long-delayed reforms that might just save them when the inevitable hits. And look where the Greenspan Put led — many will argue it caused a lot of trouble as artificially low interest rates inflated asset prices that culminated in the 2008 crisis.

Xavier Baraton, CIO for fixed income at HSBC Global Asset Management, warns against reading too much into the decision or emerging markets’ reaction to it:

More immediately it will stop the haemorrhaging of flows and will reassure people that EMs can weather the storm… (But) emerging markets have more structural problems to cope with, they are dealing with deterioration in current account balances, long term investment issues and competitiveness issues so it’s not something that can be fixed thanks to Mr Bernanke.

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