Stephen Jen: “There’s Tremendous Deceleration In Emerging Markets. You May See Crisis-Like Price Actions Without Having A Crisis.”

Emerging Markets Crack as $3.9 Trillion Funds Unwind: Currencies

Investors are pulling money from emerging markets at the fastest pace in two years as slowing economic growth and the prospect of less global stimulus sink stocks, bonds and currencies from India to Brazil.

More than $19 billion left funds investing in developing-nation assets in the three weeks to June 12, the most since 2011, according to EPFR Global. Foreign investors dumped an unprecedented $5.6 billion of Brazilian stocks and $3.2 billion of Indian bonds this month, exchange data show. JPMorgan Chase & Co.’s emerging currency index is down 1.4 percent this quarter, while the rupee hit a record low last week and the real reached the lowest level since 2009.

“These are pre-quake tremors: something big is coming,” Stephen Jen, the co-founder of hedge fund SLJ Macro Partners LLP, said in a phone interview from London on June 12. “There’s tremendous deceleration in emerging markets. You may see crisis-like price actions without having a crisis.”

The reversal of the $3.9 trillion of cash that flowed into emerging markets the past four years has been compounded by popular protests in Turkey and Brazil challenging government policies on everything from fighting inflation to developing infrastructure. China, the largest developing economy, is forecast by the World Bank to expand at the slowest pace since 1999 this year, while current-account deficits in Indonesia, Brazil and Chile have grown to the widest in a decade.

EMERGING MARKETS-Shares and bonds rocked by U.S. Fed comments

“We are seeing big moves on emerging markets but we will see more,” said Maarten-Jan Bakkum, investment strategist for ING Investment Management’s emerging market funds.

“Even a marginal change in Fed (liquidity) injections will have an impact on emerging markets as it will add to the fundamental problems we are seeing in the sector. You also should not underestimate what’s happening in China.”

Emerging Markets Bump Into Growth Constraints

Emerging Markets Meltdown?

Emerging Market Outflows

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Emerging Markets & Violence

China Manufacturing Contraction Deepens Amid Cash Pinch

China’s manufacturing is shrinking at a faster pace this month, adding to stresses in the economy and financial system after interbank borrowing costs surged to the highest in seven years.

“It seems that the PBoC and some other regulators could be taking the opportunity of the tight funding conditions to ‘punish’ some small banks which had previously taken advantage of the stable interbank rates to finance their purchase of higher-yield bonds,” wrote Lu. 

This also comes at a time when banks are required to meet their loan-to-deposit ratio requirement in filings to both the central bank and the China Banking Regulatory Commission (CBRC).

Read more:

The International House of Cards: China Interbank Market Freezes As Overnight Repo Explodes To 25%

A pyramid scheme can only collapse, it cannot unwind

It seems liquidity (or counterparty mistrust) is beginning to reach extreme levels in China as the nation’s banking system is now quoting overnight repo transactions at 25%. The explosion in funding costs echoes the collapse in trust (and surge in TED spread) among US banks in the run-up to the Lehman bankruptcy. MSCI Asia-Pac stocks are down over 3% with China’s Shanghai Composite -2.5% at seven-month lows.

  • China’s 1-day Repo Rate Climbs to Highest Since at Least 2006


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