Emerging Market Outflows Likely to Continue

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Emerging Market Outflows

During Puplava’s last discussion with FS Insider, he noted that we won’t be able to tell who’s swimming naked, so to speak, until the tide goes out.

With the Fed cutting its balance sheet and the ECB beginning to taper along with other central banks slowing down, the cumulative change in their balance sheet began to peak in the early part of this year.

qe unwind liquidity
Source: Fidelity Capital Markets, Quarterly Market Update (Q1, 2018)

This is what we ended up seeing in the first two quarters of this year, Puplava noted. Based on his projections, we should continue to see outflows from those riskier areas, such as emerging market equity, debt and junk bonds through the remainder of this year.

“There are really a couple of issues going on that are hurting the global economy,” he said. “We're seeing interest rates rise globally. We've seen inflation pickup. And we’ve seen commodity prices picking up at the same time. Liquidity is beginning to be drained by central banks in terms of slowing down QE. At least here in the U.S., we've gone from QE to QT, quantitative tightening, by shrinking the balance sheet. … All of these things are having an impact.”

See: Credit Default Swaps Show Liquidity Risks Remain

Rising Dollar Impacts and Stress Buildup

Another issue is the rising dollar. Many governments and companies around the world transact in dollars, and in the case of dollar-denominated debt, debtors feel the pinch in their local currency when they have to pay back in dollars.

em refinancing wall

In the event that we see our third global growth slowdown, people will begin to be scared and flee to safety, which usually means U.S. Treasuries and the U.S. dollar will be bid up.

“That only adds fuel to the fire,” Puplava said. “When the dollar strengthens, that creates even more stress. … I still think we're in the early innings of this.”

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