Central Bank View™ – FED Decision and Global Markets

The FED (US Federal Reserve) decision to keep monetary stimulus at the same level had been initially positive for the markets, especially emerging markets.  However, subsequent news that the decision was close and expectations that the stimulus might be reduced during the next meeting in October or in December led to a reversal on stock prices this Friday.

Many emerging markets were relieved of this decision.  Prices increased last week, especially in the most vulnerable emerging markets.  For some countries, this is a chance to implement reforms in order to boost market confidence.

Companies in emerging markets have benefited by issuing debt in cheap dollars.  However, large current account deficits in countries such as Turkey, India and Indonesia for example has made the markets nervous with resulting currency depreciation.  This slowly defeats the advantage of the dollar debt.

When the FED finally decides to take away the monetary stimulus, corporates in emerging markets will be facing an environment of higher interest rates (domestically and internationally) and a reduced ability to obtain funding overseas. Domestically, growth is slowing and sooner or later the central banks in these countries will need to raise interest rates due to current account problems.

Take the case of Turkey for example, the banking sector is sound and well capitalized at the moment.  However, individual companies will face problems.   In China there has been a lot of borrowing by companies, while in southeast Asia it is the consumer that is the problem.

Politically, this provides a little bit of time for some of these countries to implement policies to fix problems.  The question is whether the politicians will see this something to not worry about (risky) or as an opportunity.

In short, the next two three months should be interesting and offer some medium-term trading opportunities. Several option strategies are available to capitalize on expected price movements.  Let’s not forget that any surprises in Syria and with oil prices could change the thinking of policymakers.