Wicked winter puts big chill on job creation

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Job growth saw another weak month in January, with employers adding just 113,000 positions as frigid weather and a deluge of storms, along with a continued economic slowdown, helped dampen hiring.

The Bureau of Labor Statistics also reported Friday that the unemployment rate fell to 6.6 percent. The labor force participation rate remained mired around 36-year lows, though it edged higher to 63 percent, and some economists said that for a change the drop in the rate came for good reasons.

Economists expected 185,000 new positions were created in January, from a slightly upwardly revised 75,000 in December, with the unemployment rate holding steady at 6.7 percent.

An alternate measure of unemployment that includes discouraged and underemployed workers slid from 13.1 percent to 12.7 percent, its lowest level since November 2008.

(Read more: This is what Greenspan is really worried about …)

Markets shrugged off the number after turning negative momentarily. Futures indicated a sharply higher open on Wall Street.

“On an absolute kind of real-economy basis, this does confirm that there’s probably some degree of slowness out there, but I don’t think it’s catastrophic,” Brad McMillan, chief investment officer for Commonwealth Financial, which manages USD 81.6 billion for clients, said in a phone interview. “You had the same kind of differential last time where the unemployment rate is going down at the same time as we get a very disappointing number. Clearly, there’s some kind of discrepancy between the establishment survey and the household survey. The best explanation for that is weather.”

The household survey showed that 262,000 people said they couldn’t work because of the weather, though that number was below the norm for January and indicative to economists that that weakness went beyond the turbulent climate.

The report, then, could fuel fears that the job-creation engine is sputtering, after December’s anemic number, originally reported as 74,000. That in turn could play into decision-making at the Federal Reserve, which has reduced its monthly asset purchase program by USD 20 billion a month to USD 65 billion. Dallas Fed President Richard Fisher, who has backed a faster unwinding of the easing program, told CNBC that a single data point is unlikely to sway policy.

“They would need some pretty darn compelling evidence to (risk) creating the impression that the Fed is flip-flopping,” McMillan said.

(Read more: Fed’s Fisher: We’re on right QE3 taper course)

January’s performance was well off the 2013 pace, during which the new positions averaged 194,000 per month. Construction led the way, with 48,000 new positions, while professional and businesses services grew by 36,000, manufacturing added 21,000 and wholesale trade created 14,000 new positions. Leisure and hospitality grew by 24,000, below the 38,000 per month in 2013.

“It’s two strikes in the economy and it’s down in the count. I don’t think it’s going to strike out,” said Stuart Hoffman, chief economist at PNC, which manages USD 127 billion. “After two weak payroll reports, the stock market is saying that’s good news (in terms of the Fed reversing its tapering) or they’re looking underneath this and seeing a few silver linings.”

Looking at the internals, long-term unemployment—the most pernicious part of the struggling U.S. jobs picture—moved lower by 232,000 to 3.6 million. The average duration of joblessness fell to 35.4 weeks, its lowest in a year but still well above pre-recession levels.

Construction growth led to doubts that weather was the sole factor in the jobs slowdown.

“Using weather as an excuse is wrong, because construction actually had an increase in the month,” said Todd Schoenberger, managing partner at LandColt Capital. “The labor market is in a dangerous position right now as it seems to be deteriorating at a rapid pace, with little evidence to support a turnaround anytime soon.”

On Wall Street, job growth was stagnant, though there’s some optimism that could be changing soon.

“There’s a lot more demand to hire this year than there was a year ago,” said Paul Sorbera, president of Alliance Consulting, a Wall Street executive search firm. “Wall Street kind of bottomed out somewhere last year in compensation, and Ithink the year has been a bottoming out on the layoffs. They’ve cut back so far really that they’ve cut down to the bone.”

Government saw a contraction of 12,000 positions, primarily due to Postal Service cutbacks.

The report contrasted strongly with Wednesday’s reading from ADP and Moody’s Analytics, which indicated the private sector added 175,000 new positions.

The average workweek was unchanged at 34.4 hours while average hourly earnings rose 5 cents to USD 24.21.

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Does Sony’s shakeup signal sea change for Japan Inc?

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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The major restructuring of Sony`s consumer electronics units may signal that a long-awaited shakeup to break Japan Inc. out of its doldrums has finally begun.

“Zombie” companies resisting change and offering little in the way of growth had long plagued Japan`s moribund economy. In the wake of Abenomics – a series of policy measures unveiled under Prime Minister Shinzo Abe to jump start the economy – that may be changing, with more companies beginning to shake up their business models, especially in the face of increasing competition from abroad.

“There`s a real feeling in corporate Japan that we have got to change. Evidence of that happening is most welcome,” Mark Matthews, head of research for Asia at private bank Julius Baer, told CNBC.

At its quarterly earnings announcement Thursday, Sony said it would hack off its long-ailing computer and television businesses, stepping up its restructuring efforts. The turnaround efforts include plans to cut around 5,000 jobs, a once-taboo step in corporate Japan.

Sony isn`t alone. Panasonic has emerged from a period of heavy losses after it sold off some units and shifted its focus toward industrial, rather than consumer, clients; its efforts also included reducing its workforce by more than 30,000 workers.

“It`s indicative of the wake-up call that Prime Minister Abe is having. It`s really causing positive reverberations throughout corporate Japan,” Matthews said.

“Japan has rightly realized that if they don`t do something, they`re going to slowly sink into the Pacific Ocean and become vulnerable and irrelevant,” he said. “In a way, Sony is a microcosm of that.”

Others also see the crossing of former taboos could indicate Japan`s corporate world is heading into a period of major changes.

“Japan has been the last bastion of jobs for life,” said Shane Oliver, head of investment strategy at AMP Capital. “Maybe it does indicate a shift of structure in Japan.”

Oliver noted that Abe likely isn`t a fan of the layoffs, as they will complicate his efforts to push companies for much-need wage increases.

“One thing Japan needs is higher wages growth, but if other companies follow Sony`s lead, it may not get that,” Oliver said.

But he added, “If Prime Minister Abe wants a new Japan, then some people will have to lose their jobs,” noting “ultimately, a stronger Japan will lead to more jobs.”

To be sure, not everyone is convinced Japan Inc.`s moves indicate a drive for growth so much as a painful necessity.

“It`s a painful adjustment to slower growth,” said Tim Condon, head of research for Asia at ING Financial.

“North Asia is a big loser from slower growth in China,” Condon said. “The really beneficial effects of rapid growth in the early part of the century are running in reverse,” he said, noting that Japan was a major beneficiary of China`s rapid growth before the Global Financial Crisis.

“(Sony) didn`t want to do this. They`re doing this to save the company,” he said. “Other companies are going to be facing the same kind of pressures as Sony. There`s a limited amount the (weaker) yen can do to help out there,” he said.

Sony itself may see its moves as only a retrenchment in the face of tough competition, rather than a springboard for growth.

“I hope that this will be the last time I will need to restructure on this scale,” Kazuo Hirai, Sony`s CEO said at a press conference. “It may not be to this magnitude in the future, but we will always need to review and realign our business portfolio as a time like this when competition is intense.”

Indeed, it`s likely noteworthy that Sony`s moves leave the company`s basic structure intact. Last year, Sony rejected calls from billionaire investor Daniel for a breakup of the company, with spinoffs of the entertainment and insurance divisions.

-By CNBC.Com`s Leslie Shaffer; Follow her on Twitter @LeslieShaffer1

Copyright 2011 cnbc.com

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What US payrolls may mean for frail emerging markets

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Any upbeat surprise in Friday’s closely-watched US non-farm payrolls report could bring some relief to battered emerging markets, some analysts say.

That’s not what you might expect given that emerging markets from Turkey to Brazil and India have been hurt as the US Federal Reserve starts to unwind its monetary stimulus in light of a brighter growth outlook.

(Read more: A weak jobs report really could be a snow job)

“Ordinarily better jobs data would have led to a sell-off in emerging markets, which fear the taper, but this has been turned a bit on its head recently as weak US numbers have added to fears that taper could take place in a world where the growth outlook is not that fantastic,” said Vishnu Varathan, market economist at Mizuho Corporate Bank in Singapore.

“So any upside surprise today would be positive for emerging markets since they would find some consolation in that there would be some justification in taper if the US is growing,” he added.

Economists polled by Reuters expect the US economy generated 185,000 new jobs in January compared with 74,000 in December. The unemployment rate is seen steady at 6.7 percent.

A much weaker-than-expected survey on US manufacturing activity earlier this week sparked sharp selling in both developed and emerging markets as worries about the outlook for growth in the world’s biggest economy took hold.

(Read more: Manufacturing slows sharply in January)

“The mood of the market has changed since last year. Last year, when we had a correction in June that helped delay a tapering by the Fed,” Eddie Tam, CEO at Central Asset Investments in Hong Kong told CNBC Asia’s “Cash Flow.”

“But this time if the [payrolls] numbers are bad we don’t expect a slowdown in the pace of tapering. So unlike last year when bad news was interpreted as good news, this year bad news is bad news and we are fortunate if good news is not interpreted as bad news,” he added.

All about the economy

In short, analysts say while a scaling back of Fed stimulus is now widely expected, a slowdown in the US economy, on which many developing countries depend upon for trade, is not.

“You had a good fourth quarter GDP [gross domestic product] number and expectations are that growth will accelerate in 2014, so a couple of bad payrolls numbers and people start shaving that 2014 growth forecast,” Tim Condon, head of research for Asia and ING Financial Markets said, referring to recent data showing the US GDP grew at a 3.2 percent annual rate in the final quarter of 2013.

(Read more: India and Indonesia: Now so bad after all?)

“When growth worries are paramount you want to be a little bit distant from emerging markets, which explains the move in emerging-market equities this week,” he added.

And while a degree of calm has returned to financial markets, emerging markets in particular remain sensitive to US economic data, analysts say.

The MSCI Emerging Markets Index stood at around 932 points on Friday, two percent above a five-month low hit earlier in the week.

— By CNBC.Com’s Dhara Ranasinghe; Follow her on Twitter
@DharaCNBC

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How India and Indonesia escaped selloff

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Last year, they were the two emerging markets in Asia not to touch with a barge pole. Yet for India and Indonesia, a few months appears to have made a big difference.

The two countries have come off relatively unscathed in the latest bout of volatility to hit emerging markets amid a scaling back of the US Federal Reserve’s monetary stimulus and worries about the global growth outlook following weak data from the U.S. and China.

(Read more: Is Indonesia’s rosy growth a flash in the pan)

While not out of the woods yet, India and Indonesia have made progress in convincing investors that they will do whatever it takes to rein in wide current-account deficits and get their houses in order, analysts say.

Both countries have raised interest rates sharply since the second half of last year, when heavy selling in emerging markets first took hold. Other measures such as restrictions on gold imports in India to help bring down the current account deficit have also helped boost sentiment.

“We are now in an environment where we can see lots of idiosyncratic differences in the countries. Asia for me is standing out versus other parts of the world,” Hayden Briscoe, director of Asia Pacific fixed income at Alliance Bernstein, told CNBC earlier this week.

“Indonesia is one we have a brighter light on compared with other countries,” he said. “They have gone a long way to improving their productivity, so we’re looking to put some money to work there either in the bond market or currency.”

(Read more: ‘Fragile Five’ face low risk of full-fledged crisis: Roubini)

 Indonesia this week posted its third straight monthly trade surplus in December and at $1.52 billion, the surplus was the biggest in two years. Southeast Asia’s biggest economy also surprised markets on Wednesday with better-than-expected fourth-quarter economic growth data.

India meanwhile delivered an unexpected interest-rate rise last week, a move seen by analysts as a pre-emptive strike against inflation.

“We expect India will continue to struggle with persistent inflation, current account and fiscal deficits, and a slow pace of reforms,” Wells Fargo said in a note on Thursday. “However, we believe the worst of these troubles has passed and appropriate measures will be enacted to combat these issues.”

While the Turkish lira sank to a record low and the South African rand hit a five-year low last week, the Indian rupee and Indonesia rupiah have been relatively stable.

 The rupee, which hit a record low against the greenback last August, is down just 1 percent this year to around 62.52. The Indonesia rupiah, which slid 26 percent last year, has been stable around 12,170 per dollar.

(Read more: Indonesia Finance Minister: No deficit issue in 2014)

Indonesia’s stock market meanwhile has outperformed other members of the fragile five big emerging market economies that also include India, Brazil, Turkey and South Africa, with gains of 2.6 percent this year. In contrast, Brazil’s stock market is down 9.5 percent.

“You’ve got to be selective, it’s [emerging market volatility] not going to hit all of them, so you have to look at strong models with strong policy and strong balance sheets,” Medha Samant, investment director of Asian equities at Fidelity Worldwide Investment, told CNBC this week.

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Australia stocks no longer expensive: Goldman

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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The global market selloff has a silver lining for Australian stocks, as the highest yielding developed market globally is no longer too expensive, Goldman Sachs said.

“Following the underperformance of Australia relative to global markets and its continued growth in dividends, Australia has now moved back to a position where it no longer looks overvalued on the basis of yield,” Goldman said in a note.

(Read more: 2014 a `litmus test` for Australia economy: Goldman )

After global bond yields hit their nadir in mid-2013, yield-chasing reached extreme levels, pushing Australia`s high-dividend payers up to the point where the market looked as much as 20 percent over-valued, the bank said.

In May, when the 10-year US Treasury yield was near its 1.7 percent low, the average Australian index stock with a 5-6 percent yield traded at 15.4 times earnings, around 15 percent above the international average, while stocks with dividend yields of more than 6 percent were at a 30 percent premium to global averages, the bank noted.

(Read more: Are fears of an Australian housing bubble overblown? )

“In the period since, Australia`s under-performance as bond yields rose combined with further dividend increases have seen this yield premium disappear,” it said.

With the market`s recent fall – the SandP/ASX 200 index is down around 4 percent since the start of the year – and expectations that low interest rates will stick around for a while, Goldman believes the 4.8 percent yield for the index will keep shares supported.

Even better for yield chasers, Goldman believes the dividends can be sustained even though it expects this year`s earnings forecasts may slip and even if economic conditions don`t improve.

(Read more: Australia keeps rates steady at a record low )

The bank does expect a weaker Australian dollar and loose monetary policy will drive an earnings recovery into the end of the year.

To be sure, it expects most companies won`t be able to surprise with dividend increases this year, as the pay-out ratio for index stocks already averages around 70 percent of earnings, a 20-year high. It also noted dividends per share have increased by 8 percent over the past two years even as earnings per share have fallen six percent.

(Read more: Has the tide turned for corporate Australia? )

“Given historically high pay-out ratios, we expect dividends to grow at or below the growth rate in earnings, but believe they have very limited downside in the current environment,” it said.

The big exception may be the beaten down mining sector, it said, noting that its payout levels are low, with consensus forecasts calling for the companies to pay out only around 37 percent of earnings this year.

“The mining sector remains the most likely to deliver capital management surprises,” Goldman said. “While earnings volatility is high as the commodity super cycle ends, mining firms remain focused on cutting costs and reviewing their capex budgets.”

-By CNBC.Com`s Leslie Shaffer; Follow her on Twitter @LeslieShaffer1

Copyright 2011 cnbc.com

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Gold bugs, be patient your time is coming

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Demand for physical gold has soared. Okay, so that hasn’t shown up significantly in the spot gold price yet but that’s likely to come soon, some analysts say.

“Physical gold is disappearing off the market at a terrible rate. As soon as that really starts to hit I think gold goes through the roof,” Jim Walker, founder and CEO of Asianomics told CNBC. “That’s one of our biggest longs for the year.”

(Read more: Prepare for a gold ‘moonshot’: Peter Schiff)

Mints from Austria to the US and UK have reported huge demand for gold coins in recent months as a slump in gold prices last year spurred buying of physical metal.

The Perth Mint, which runs Australia’s only gold refinery, said on Monday that sales of gold coins and minted bars rose 10 percent to 64,818 ounces of gold in January in the latest sign of firm demand for gold bars and coins.

Still, a number of houses including Goldman Sachs expect another bad year for gold, which fell 28 percent in 2013, amid a scaling back of the US Federal Reserve’s asset-purchase program.

(Read more: Goldman predicts steep losses for gold in 2014)

And spot gold, trading at around USD1,256 an ounce, has struggled to push above the key USD 1,300 area.

“I think we probably still have people in gold ETFs [exchange traded funds] releasing some of their gold,” said Barry Dawes, head of resources at Paradigm Securities, a Sydney-based securities advisory business, giving a reason why gold prices have not pushed above USD1,300.

“I can’t see that lasting very much longer at all and that real supply-demand numbers for gold will push to a higher gold price,” he added.

Fundamental change?

According to Dawes, gold is moving steadily into the next stage of a bull market.
Spot gold prices are up over 4 percent so far this year, outperforming other precious metals such as silver, which is up about 2.3 percent and platinum which up just 0.75 percent. “There are some fundamental changes that have taken place and one thing that I really note is the performance of gold stocks,” said Dawes. “They have started to look better but more importantly they have broken a two-year downtrend against all stocks.”

Australia’s Newcrest Mining, is up 31 percent so far this year, hitting its highest level in three months on Wednesday.

Evolution Mining, which operates five gold and silver mines in Queensland and Western Australia, has rallied about 8 percent since the start 2014. Both firms have outperformed the broader Australian stock market, which is down just over 5 percent this year.

“As long as gold holds above USD 1,175-80 it’s good, I am positive,” Sean Hyman, editor of the Ultimate Wealth Report told CNBC on Wednesday.

(Read more: Gold holds up on safe-haven bids)

“With dollar weakness we should get some base building in metals and all that equity volatility can help gold,” he said referring to a recent sell-off in global stock markets that lifted the appeal of the safe-haven asset.

— By CNBC.Com’s Dhara Ranasinghe; Follow her on Twitter
@DharaCNBC

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Fed volatility is emerging markets’ ‘poison’: Analyst

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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The notion that markets will return to ‘normal’ this year is pure fiction, one analyst told CNBC on Thursday, noting weaker emerging markets are still vulnerable to volatility stemming from the Federal Reserve’s monetary policy.

Emerging markets came back into the spotlight in recent weeks, after steep drops in the currencies of countries like Argentina, Turkey, Brazil and South Africa – all of which have current account deficits – reminded investors how vulnerable they can be to worries over a reduction in the Fed’s asset-purchase program.

(Read more: Stand by: EM turmoil sparks credit crunch fears)

Axel Merk, chief investment officer of Merk Investments, told CNBC that Fed members have been acting confused, and a lack of clarity in policy direction would continue to hurt the more vulnerable emerging markets this year.

“Fed policy is going to be volatile and the key implication from that is that it’s poison for emerging markets, because the volatility is bad for markets with little liquidity,” said Merk.

Emerging markets – which have been one of the biggest beneficiaries of quantitative easing – were hit particularly hard last year when talk of ‘tapering’ first started to panic investors, and countries with higher current account deficits saw vicious selloffs as a result.

 The Fed eventually began its taper in December when it reduced asset purchases by $10 billion, a move it repeated at its January meeting. Although many analysts now believe the end of quantitative easing (QE) has been priced in, other commentators, including Philadelphia Fed President Charlie Plosser, suggested Fed policy could still catch people off guard.

(Read more: Emerging markets—Is it time to bottom fish?)

In a speech made in Rochester, New York on Wednesday, Plosser said the current levels of tapering could prove insufficient if the economy keeps growing at its current pace, and said the Fed may be forced to scale back asset purchases faster, by mid-2014.

Merk told CNBC he was concerned Fed policy makers did not have a strong handle on things.

“The Fed is transparently confused, they don’t have a clue what’s going on and the reason they don’t have a clue is because they have taken away their gauges,” he said, referring to how QE has distorted the bond markets, making it difficult to analyze inflation expectations.

Furthermore, the market hasn’t yet priced in the new Fed chair Janet Yellen’s dovish viewpoint, said Merk, and could be surprised when she makes a U-turn in both the bank’s communication style and policy, though he believes it will be a while before any policy reversal does happen.

(Read more: Emerging markets rout a reality check for Davos elite)

 All of this will have consequences for emerging markets, he said.

“It’s not going to work…. so the emerging markets, in particular Brazil and South Africa – they’ll be jolted around, maybe Turkey as well,” he said. “We will continue to be in an environment where there are heavy handed choices [made] by policy makers and the market is going to react. This notion that we go back to normal as many folks say out there isn’t going to happen anytime soon.”

However, other analysts told CNBC that there has been confusion over how reliant emerging markets have been on the Fed’s flow of easy money.

(Read more: Did the Fed sink the emerging markets?)

“I am confounded by this assumption that the emerging markets have somehow been major beneficiaries of QE and loose monetary policies. I just do not buy into this at all,” said Jim Walker, founder & CEO of Asianomics, who told CNBC on Wednesday that he believed the emerging market correction was largely over.

“The main beneficiaries of the Fed’s QE program have been US equities and partly US housing market,” he added.

Walker said the main reason economies like Argentina and Turkey have suffered such brutal selloffs this year, was due to individual structural problems that should have already been addressed, rather than a direct impact of Fed monetary policy.

Tim Condon, head of Research for Asia at ING Financial Markets, said the market has misidentified the cause of the recent bout of emerging market stress.

“We attribute the stress in emerging markets to growth worries, not G3 monetary tightening worries,” said

“The 10-year US Treasury yield is a principal determinant of emerging market creditworthiness but its re-pricing for the taper occurred in May-August of last year,” he added.

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Global stock selloff – Rumble or rout?

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Stock markets in the US, Japan and Europe appear to have joined emerging markets in the doldrums, but is the sharp sell-off just a rumble or is a deeper rout on its way?

The consensus so far is this: equities could fall further especially if economic data disappoints, but until that happens the big picture of a brighter growth outlook has not changed so don`t panic just yet.

(Read more: Markets fear US chilled by more than weather )

“The interesting thing is how much movement there has been on so little information,” said California-based John Rutledge, chief investment strategist at private investment firm Safanad. “We`ve had a weak US ISM number and China PMI which registered just a small fall, so that would suggest this (sell-off) is a correction, ” he said referring to recent data showing slowing factory activity in China.

“The one thing that is different this time around is that the US, Japan and Europe are growing and that means higher interest rates, so people who had exposure to emerging markets when rates were low are closing out of those positions,” he added.

Japan`s Nikkei stock index fell 3 percent on Tuesday to its lowest level in almost three months following a sharp fall in US stocks. The Nikkei, is now in correction territory with a fall of more than 10 percent from a six-year high of 16,320 points hit in late December.

(Read more: How bad will the Nikkei meltdown get? )

On Monday, the SandP 500 suffered its worst single-day drop in seven months after the Institute for Supply Management (ISM) said its index of national factory activity fell to its lowest level since May 2013.

That news follows disappointing data from China last month, adding to jitters in emerging markets that have been hurt by a scaling back of US monetary stimulus.

“You have to decide what`s going on. Is this a correction in a bull market or the emergence of something fundamental to the downside?,” said Bob Doll, chief equity strategist at Nuveen Asset Management.

“Our view is the former, that this is a normal correction. We had one less than a year ago,” he said, adding: “The question for US stocks, aside from will there be significant contagion from emerging markets, is how strong is US growth going to be, and until we get some answers we will be flapping in the breeze.”

Both the blue-chip Dow Jones Industrial Average and Nikkei have this week dropped below their 200-day moving averages for the first time since 2012, a major bearish signal from a technical perspective.

The SandP 500 is down about 3.6 percent so far this year, but is up 19 percent over the past year.

Japan`s Nikkei, which surged 57 percent last year, isn`t the only market in correction mode. Russia`s stock market is also down more than 10 percent since the start of the year, while stocks in Brazil and Turkey are not far behind will falls of roughly 9 percent.

(Read more: Market Correction: CNBC Explains )

“The global economy is not in a significantly different position to where it was a month ago when stocks were much higher,” said BlackRock Global Chief Investment Strategist Russ Koesterich. “What has changed is sentiment especially towards emerging markets. From that perspective, there`s probably some more downside. If we pull back another 4-5 percent, that`s a good buying opportunity.”

– Reporting by Dhara Ranasinghe; Follow her on Twitter at @DharaCNBC

Copyright 2011 cnbc.com

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Thursday’s filing dispelled some doubts, though Musk still has work to do. He and his advisers will spend the coming days vetting potential investors for the equity portion of his offer, according to people familiar with the matter

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Why an emerging markets panic may be justified

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Despite every effort from policymakers and central bankers, the emerging markets sell-off continues – and there are more warnings that this might settle in for the long haul.

Emerging market economies are bigger and more closely linked to developed market economies than ever before and the term can seem increasingly obsolete when applied to a country like China — the world’s second biggest economy. This could mean that when faster-growth markets sneeze, more established economies like the US and Europe catch a nasty cold.

(Read more: What happens in EM (mostly) stays there: Goldman)

“The (US) economy’s reliance on private final demand will be important to the extent that US exports, which have recently been strong, eventually slow in response to a strengthening dollar and weaker growth in the emerging markets,” analysts at Deutsche Bank warned Thursday.

One of the key data points to watch out for will be import figures. Turkey and South Africa have both seen their currencies plunge in value against the dollar this week, despite aggressive action from their central banks, a sign that market confidence in their economies is falling.

(Read more: Are emerging markets on the brink of another crisis?)

A weaker currency in Turkey and South Africa will mean that businesses there will find it harder to afford goods and services from other countries. And in turn this will hit the order books of the world’s biggest economy — the US.

“The fact that currencies weakened despite policymakers responding to the sell-off opens up the potential for a new and more dangerous phase of the crisis,” Neil Shearing, chief emerging markets economist at Capital Economics, told CNBC.

The US Federal Reserve Open Markets Committee’s decision to continue scaling down its asset purchase program, despite the effect such action has had on emerging markets in the past, suggests that it is not concerned about the potential contagion for the US.

(Read more: Did the Fed leave emerging markets out in the cold?)

Turkey and South Africa’s combined global gross domestic product (GDP) only amount to around a tenth of the US’s. But a slowdown in more than one of the bigger BRIC (Brazil, Russia, India, and China) countries, which have tripled their share of global GDP in the past 15 years, would have a much bigger impact.

China is experiencing rising wages and slowing growth, together with increased worries about the size of its banking sector and whether that sector is in the middle of a credit bubble. Close to half of all private credit in China is up for refinancing in the next year, according to Morgan Stanley calculations. Harsher conditions for borrowing could mean further belt-tightening and slowing growth in China’s demand for western goods.

But Mark Mobius, the emerging markets champion who is chairman of Templeton Emerging Markets Group, has stayed optimistic amid the current turmoil.

“Emerging markets’ economic growth rates in general continue to be at least three times faster than those of developed markets; emerging markets have much greater foreign reserves than developed markets; and the debt-to-GDP ratios of emerging market countries generally remain much lower than those of developed markets,” he argued.

– By CNBC’s Catherine Boyle. Twitter: @cboylecnbc

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Has the Fed left emerging markets out in the cold?

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Just because the US Federal Reserve did not mention the recent emerging-market volatility following its latest meeting it doesn`t mean it`s not watching the turmoil closely, analysts say.

The Fed on Wednesday concluded a two-day policy meeting with a decision to unwind its massive monetary stimulus program by a further USD 10 billion.

Contrary to some expectations, the central bank did not address the sharp sell-off in emerging markets from Turkey to Argentina and South Africa, triggered in part by the scaling back of Fed stimulus that has helped underpin flows into such markets in recent years.

“From the viewpoint of domestic US economic conditions the statement is completely anodyne. From the point of view of emerging markets, the Fed has just said `hasta la vista, baby,`” Steven Englander, global head of G10 currency strategy at Citi, said in a note.

US and Asian equity markets fell sharply following the Fed`s move. Asian currencies headed back towards their recent lows against the dollar and the Turkish lira  slipped 0.2 percent to 2.26 to the dollar, having strengthened to as much as 2.16 on Wednesday as a sharp hike in Turkish interest rates a day earlier offered the battered currency some respite.

Against a backdrop of sharply weakening currencies and heightened concerns about an outflow of foreign cash, central banks in India, Turkey and South Africa have all raised interest rates this week.

“There was no mention of emerging markets in their (the Fed`s) statement. From a US perspective, what`s going on in emerging markets so far is not going to have a significant impact on the US economy,” said Mark Zandi, chief economist at Moody`s Analytics.

“My sense is that the Fed has emerging markets on their radar screen, but so far it`s not signaling any major problems for them to rise to the level to be in their statement,” he added.

In short, say analysts, the fact that the Fed omitted a mention of the emerging-market turmoil in their statement should be taken as a sign that they do not view the current bout of turmoil as a systemic risk that could hurt the U.S. economic outlook.

“I was not surprised that the Fed didn`t comment on emerging markets because it was a recent development and doesn`t represent a sustained development,” Peter Bain, president and CEO at Old Mutual Asset Management in Boston told CNBC Asia`s ” Cash Flow .”

Quincy Krosby, a market strategist for Newark, New Jersey-based Prudential Financial, added this: “Just because they were not mentioned in the statement doesn`t mean the Fed has closed its eyes to what`s happening in emerging markets.”

“Central banks have regular contact with each other and if the turmoil in emerging markets was viewed as systemic then the Fed would act. Right now the perception is that the problems are confined to individual markets such as the Ukraine, Turkey or Argentina,” she added.

– Reporting by Dhara Ranasinghe; Follow her on Twitter at @DharaCNBC

Copyright 2011 cnbc.com

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