Bank for International Settlements (BIS), “International Banking and Financial Market Developments”, Quarterly Review, March 2014
The retrenchment from emerging market economies resumed in full force around the turn of the year, as their subdued growth outlook continued to diverge from the optimistic sentiment in mature markets and as US monetary policy reduced the flow of easy money. Investors were also unsettled by signs of economic weakening and growing financial risks in China. The upshot was portfolio outflows and declining asset values. In parallel, some emergingmarket currencies depreciated sharply, prompting authorities to defend them by raising policy rates and intervening in foreign exchange markets.
While the average exchange rate dynamics during the January sell-off were similar to those in mid-2013,the underlying drivers differed. After the unexpected official announcement thatthe Federal Reserve envisaged tapering its large-scale bond purchases, the large depreciations inthe earlier episode tended to be by the currencies of emerging market economieswith large external imbalances, high inflation or rapidly growing domestic credit. By contrast, the recent depreciations reflected political uncertainties and differences in growth prospects. Central banks in emerging market economies also intervened much more forcefully this time round, thereby stabilising and in some cases boosting their currencies.
In advanced economies, markets maintained their rally into the first weeks of 2014. Investors there rode on policy commitments to support growth as well as on positive economic surprises, notably in the euro area and the United Kingdom. Thus, they took in their stride the announcement and subsequent start of US tapering. The tightening of credit spreads continued until mid-January, while steady inflows into equity funds maintained upward pressure on stock prices. However, towards the end of January, disappointingdata on US job growth and headwinds from emerging market economies led to a sharp, albeit temporary, drop of valuations in all but the safest asset classes.
Relevant posts:
- ECB, (2013), Financial Stability Review – November 2013, Frankfurt: ECB..
- Aubrey, T., (2013), “Making Markets Work”, Policy Network, October.
- Alpha Bank, (2014): Εβδομαδιαίο Δελτίο Οικονομικών Εξελίξεων, 28 February.