The recent bout of volatility in the capital markets owes much to the turmoil seen in the emerging markets. Both emerging market bonds and equities have recently been hammered on the basis of:
- Slower growth in China; and
- The whispers of Fed "tapering", which caused an unwind of the risk trade in EM bond and equities.
VIX and More
The bear case for equities
At a crossroads: The Fed, China and earnings
Tim Duy
Benn Steil and Dinah Walker
The Hill
A drawn-out debt ceiling fight in Congress could undermine the jobs growth that is expected later this year.
Economists argue that the nation's economic expansion is poised to accelerate in the fall once it weathers the headwinds of tax hikes and spending cuts.
Jon Hilsenrath articleBloomberg
China and the EM contagion effect
Ed Yardeni's analysis
BBC
"The main risk related to China remains the possibility that high investment rates prove unsustainable, provoking a disorderly unwinding and sharp economic slowdown," it warned.
It further added that "should investments prove unprofitable, the servicing of existing loans could become problematic - potentially sparking a sharp uptick in non-performing loans that could require state intervention".
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China credit bubble [is] unprecedented in modern world history: The agency said the scale of credit was so extreme that the country would find it very hard to grow its way out of the excesses as in past episodes, implying tougher times ahead.
"The credit-driven growth model is clearly falling apart. This could feed into a massive over-capacity problem, and potentially into a Japanese-style deflation," said Charlene Chu, the agency's senior director in Beijing.
"There is no transparency in the shadow banking system, and systemic risk is rising. We have no idea who the borrowers are, who the lenders are, and what the quality of assets is, and this undermines signalling," she told The Daily Telegraph.
Business Insider
"Most shocks that have created sudden stops in the last 30 years have not been big enough to engulf all of EM, nor did they affect systematically important countries first," write the analysts.
"Rather, it was the combination of a shock to a vulnerable economy and contagion that spread the shock to other economies sharing a common characteristic with the economy at the epicenter of the shock."
What about earnings?
Ed Yardeni
Thomson-Reuters
Correction over?
Disclosure: Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. ("Qwest"). This article is prepared by Mr. Hui as an outside business activity. As such, Qwest does not review or approve materials presented herein. The opinions and any recommendations expressed in this blog are those of the author and do not reflect the opinions or recommendations of Qwest.
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