Re-Emerging Markets: Currencies Tell a Tale

EM currencies continued to reflect the very real differences between markets; credit spreads in Europe continued to reflect the eventual departure of the ECB as bond buyer of note; as Greece began its post-bailout status, sovereign debt reflected the country’s improved, but not yet solid footing.

As of market close on Tuesday, August 21, it was a mere seven trading days since the turmoil in Turkey roiled Emerging Market (EM) currencies, bonds and equities. But markets appear to be making their own choices about which economies may be under pressure due to country-specific issues, and which countries’ securities are being buffeted by indiscriminate selling.

An example: the currencies of Brazil, Russia, Turkey and Argentina were left behind between the close of business on August 17 and mid-afternoon Tuesday, August 21 (see the accompanying chart). Each of these countries has its own well-known set of challenges which could account for the continued pressure on its exchange rates.

Source: Bloomberg, August 21, 2018. Past performance is no guarantee of future results. Indexes are unmanaged, and not available for direct investment. Index returns do not include fees or sales charges. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

That’s not to say that the rest of the EM world is free of challenges. But it’s notable that financial markets are behaving, at least for now, as if each country’s troubles might be relatively unaffected by the others’.

On the Rise: European Credit Spreads

The European Central Bank (ECB) has made it clear it wants to get out of the bond-buying business, starting a year from now. In reaction, Europe’s corporate bond markets are in the early stages of adapting to a world where fundamentals, rather than central banks, will again drive prices.

Source: Bloomberg, August 21, 2018. Past performance is no guarantee of future results. Indexes are unmanaged, and not available for direct investment. Index returns do not include fees or sales charges. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

In that context, the rise of credit spreads should be unsurprising; credit analysis now matters more than before as buyers become more discriminating, both in terms of rating preference and in terms of individual issuer risk.

After a difficult decade, Greece emerged from formal control of its bailout program on Monday, August 20. With that transition, the role of the so-called “troika” of the European Central Bank, the International Monetary Fund and the European Commission changes from outright control to careful monitoring.

Post-bailout, the Greek economy is far from thriving, Unemployment is still about 20%, the economy is growing at a rate of about 1.5% per year, and the government’s privatization program is taking much more time than originally planned.

These challenges are reflected in the yields for Greece’s sovereign debt, which is trading on April 21, 2018 at about a 340 basis point (bps) spread above benchmark German 5-year sovereign debt. That’s the highest in the Eurozone; the second highest, Italy, is about to begin difficult negotiations over its newest government budget.

But viewed in the context of the 2011 European financial crisis, 340 bps is a real accomplishment, as the chart below shows. The long intervals between March 2012 and April 2014 saw virtually no trading in Greek 5-year debt; after a false start, Greek 5-year debt again went untraded between April 2015 and August 2017.

Source: Bloomberg, August 21, 2018. Past performance is no guarantee of future results. Indexes are unmanaged, and not available for direct investment. Index returns do not include fees or sales charges. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

All of which is to say that despite the symbolic victory of moving past its bailout phase, Greece is off to a wobbly start,