Emerging markets versus the Fed

With the local market now on the back end of earnings season, with only one major top ten stock to come (WOW) on Wednesday, macro noise looks set to start haunting the region.

Comparing the ASX to the S&P over the last four weeks, you can clearly see the outperformance by the local market. The local market has managed to hold recent gain and punch higher to be up 1.21% for the month of August, while the S&P has fallen 2.56% from its all-time high on the August 1.

Although earnings season has been a fairly dull affair, it has shown that corporates are working overtime to keep a steady, prosperous ship in the current ‘challenging’ times, with right on half beating estimates on the earnings line as sales slide (only 41% of companies beat estimates on the sales line).

With most of the heavy lifters in the local market out of the way and factored in, international and local investors are turning their attention to something that is going to create waves around the global market whether the Fed likes it or not; taper.

Over the weekend the Jackson Hole symposium was expected to be a non-event as Fed chairman Ben Bernanke didn’t attend the two-day event. However, what was made clear by those that did attend is that the Fed is a domestic focused institution; which has emerging markets concerned.

Atlanta Fed president Dennis Lockhart said it best when describing the Fed as a ‘legal creature of Congress, and that we only have a mandate to concern ourselves with the interest of the US’ which is exactly what every central bank in the world is charged with.

The direct spelling out of this fact, one that was well known but has been blatantly ignored by several emerging markets, has seen severe volatility in some key emerging markets. India, Indonesia and Brazil have been under pressure in all of their respective markets (bonds, currencies and equities) as investors position themselves for a mass repatriation of funds.

The fact that the IMF and several of these markets have taken it upon themselves  to press the Fed members at Jackson Hole that the Fed should be doing more to moderate the impact of tapering on these markets is slightly off-putting. This shows that these countries have probably not taken the necessary steps to safeguard themselves for this inevitable outcome. 

We understand that in the current climate higher borrow rates and softer raw material prices will lead to major disruptions across emerging markets, and it will impact the Australian market directly with India and Indonesia major export trading partners. It is why we think communication is key in the next stage of US monetary policy, and that will be what the September meeting will do.

We have been calling actual taper to start in October as we believe the 18 and 19 September meeting will be the blueprint meeting; where the Fed will spell out exactly when, how, with what conditions and with a fluid timeline to completion. Therefore, there is a possibility of emerging markets to quickly align to this and reposition themselves to a post-easing world. However, this seems to be too optimistic, and the more likely move is increased volatility in equity and currency markets. It’s the bond market that will show how much of an impact taper will have. If there is a spike in yields we will see panic trading over the coming months.  

Moving to the local open and today is pretty quiet on the earnings front. Main results today are Boart Longyear, Caltex and Spark Infrastructure, which are pretty small results in the scheme of things.

The local market looks like it will continue to bounce today following the Friday moves from the US markets. The opening calls are suggesting the ASX will add 23 points to 5147 (+0.45%). BHP’s ADR is suggesting the stock will add 11 cents on the open, to $35.75 (+0.33%), having moved higher in London and New York; this should see the local market starting the week in the green.

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