Emerging Market Economies Destroyed By Economic Crisis

Everyone is asking: When Will This Bear Market Bottom Out?

Economic news alerts cannot be printed quickly enough, as the markets continue to tumble in an unprecedented fashion. From Bloomberg BusinessWeek to the Moscow Times, the news stories that are being splashed across our screens are cause for concern. With barely 2 weeks left to go before 2014 closes out, the outlook for the New Year is grim. Emerging market economies are particularly vulnerable under present market conditions. From Brazil to Venezuela, Thailand to Russia, the developing countries are taking a pounding. Emerging market economies are watching the purchasing power of their currencies eroding away by the day. As cases in point, the Russian ruble went into freefall as it reached beyond 60 to the dollar, while Brazil's corporate debt is spiralling dangerously out of control. The rout has a long ways to go yet, with plunging oil prices hitting emerging market economies and their energy sectors particularly hard. It is now evident that the well-being of rich Western countries such as the US, Canada and the United Kingdom is not sustainable with overwhelming negative economic global sentiment pervading the markets.
Are We seeing The Perfect Storm In The Financial Markets?What is playing out in the markets today is reminiscent of 1998 when the all-too-familiar oil price crash rocked the financial markets. Back then, Venezuela and Russia bore the brunt of slumping Crude Oil prices, much like they are doing today. Money managers have been particularly hard on emerging market exchange traded funds. In excess of $2.5 billion has been withdrawn en masse by US traders in the last week alone. There is zero confidence in the ability of emerging market economies to weather the financial storms ahead.

This, combined with the Federal Reserve Bank’s tapering of quantitative easing has left the markets shaky, but it is more likely that we are witnessing the confluence of multiple factors which together are creating the perfect storm in the financial markets. There are so many elements at play now, that it is difficult to pinpoint precisely what is pushing the markets ever deeper into a financial abyss. While the fundamentals in the US appear to be sound, with strong retail spending and higher consumer confidence, the same cannot be said of Europe, Japan and emerging market economies.

Now, investors are dumping stocks left, right and centre. They don't want to have a hand in the financial markets, owing to the massive instability that we are currently seeing. Liquidity seems to be the #1 priority for investors, who are perhaps waiting for stock prices to bottom out before they plough their money back into the market. No stock appears safe from investor withdrawals on Wall Street, the Hong Kong Stock Exchange, the FTSE 100, and other global bourses. As an example of precisely how bad things are, the MSCI Emerging Markets Index dropped for the seventh consecutive day on Monday, 15 December.

To date the index has now plunged more than 8% while the volatility of the CBOE has spiked to its highest level in 2 months. In Brazil, state-run Petrobras was hammered on the markets as evidence of corruption and malfeasance emerged. All companies associated with this state-run enterprise have also seen massive declines in their share prices. The situation is likely to become even more volatile if the Federal Reserve Bank decides to raise interest rates sooner than expected (first half of 2015). If interest rates are raised in December or early January, investments will be withdrawn from emerging market economies, further accelerating the global crisis.

The emerging markets decline has been particularly severe in Asia where countries like Thailand saw their stock prices plunging. The rout was led by PTT Pcl of Bangkok – which slid almost 5%. In Hong Kong, the share price of China Mobile Ltd dropped to a 7 week low. Also in Asia, India’s rupiah lost 2%. And a Bloomberg index tracking the currencies of 20 developing currencies recorded a 1.3% slide. However, in China the Shanghai Composite Index edged 0.5% higher in the hopes that the Chinese government would adopt expansionary measures. Overall, stocks from emerging market economies have fallen almost 8% in 2014.
The Russian Ruble Is Now the World's Worst Performing Currency UnitTo add to the economic woes, the Russian ruble is now the worst performing currency of 2014 as it lost 10% of its value against the USD on Monday, 15 December. In 11 months of trading in 2014, the ruble has lost approximately 50% of its value against the greenback, according to the Moscow Exchange. Russia has piled in over $70 billion to prop up its currency this year, and it still has some $420 billion in foreign currency reserves, based on information from the Central Bank. The 10% drop on Monday is the biggest ever single day decline for the ruble since the 1998 financial crisis. The currency cross exchange rates were last listed at 64.4 to the USD and 78.8 to the Euro. Russia is facing ongoing pressure as a result of its belligerence in the Ukraine, with Western sanctions being brought to bear on the ruble. There are fears that a bill sponsored by Congress – The Ukraine Freedom Support Act – could further destabilize the ruble if President Obama gives it his stamp of approval.

The RTS index plunged 10.12% on Monday, its biggest drop since Russia invaded and annexed Crimea. Plummeting oil prices have not helped matters, with Brent crude oil now trading around $60 per barrel – almost 50% lower than its June high. Investors are scurrying to find some sort of safety in the markets, but there is none. The Russian Central Bank intervened marginally to prevent a rapid acceleration of the ruble's decline, but the action was limited. The Central Bank appears – for all intents and purposes – to have adopted a hands-off approach to the rapidly devaluing Russian ruble. Currency experts previously stated that the Central Bank might have intervened in an effort to apply punitive measures against traders betting on the declining ruble, but that has not come to pass. To arrest the negative sentiment on the currency markets, the Russian government could implement extreme measures such as limitations on currency flow in/out of the country, but such measures may be a ways off yet.