(James Saft is a Reuters columnist. The opinions expressed are his own)
By James Saft
(Reuters) – Emerging markets will have a great deal at stake when Friday’s U.S. jobs figures are announced.
If the data is good and a Federal Reserve taper seems more likely, emerging markets will fall, hard, while if hiring was disappointing we can count on an outsized rally.
In part, this is for no more complicated a reason than emerging markets are at the riskier end of the investment spectrum. Bond buying works by exchanging cash for ‘safe’ assets and forcing a new investment decision with lower returns for safety. That is intended to prompt risk-taking and the riskier an investment the more, proportionally, it benefits.
But going beyond this there are structural reasons why now may be a particularly poor time for many emerging markets to be faced with tighter global monetary conditions.
First, many, notably India and South Africa, must attract investment to make up high current account deficits. With QE on, that money flows easily, but, as we saw last summer, if a bond-buying taper is in prospect, investors will quickly do new calculations.