Emerging markets face Fed meeting forewarned, inadequately armed

Wed Sep 16, 2015 2:06am EDT
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By Vidya Ranganathan

SINGAPORE (Reuters) - Despite the long drum roll anticipating what could be the U.S. Federal Reserve's first monetary tightening in years, the odds of the Fed lifting interest rates this week have lengthened so much that emerging markets could be hit hard if it happened.

Emerging market currencies have tumbled, equities have fallen and bond yields have risen steadily since the middle of the year, when Fed officials flagged the possibility that they could lift their near-zero rates in the second half for the first time in nine years.

Expectations on timing had centered on September, but as U.S. inflation came in below target, commodity prices fell and China's slowing growth cast a chill over the global economy, a delay to December looks likely.

Only seven of 17 respondents polled by Reuters expect a Fed rate rise this week. But if the minority is proved right on Thursday, investors would have to swiftly revisit their projections for how far and fast the Fed will go, affecting the cost of money across markets.

"The market is pricing in a 30 percent probability, so it is not entirely priced in," said Claudio Piron, head of Asian rates and currency strategy at Bank of America Merrill Lynch (BofAML) in Singapore.

"So it's a difficult situation in a world where we do not have a synchronized global recovery, where arguably the world's most important liquidity provider is tightening policy, and that will continue to hit commodity prices."

Most analysts expect a less violent reaction than the "taper tantrum" of May-September 2013, when the Fed's first hints at reversing several years of stimulus caused a spike in bond yields and investors sold out of several emerging markets.

That's largely because anticipation has already taken its toll; MSCI's emerging markets equity index is down nearly 16 percent this year, and its Latin American index has tumbled 27 percent.   Continued...

A casino financier, wearing rings and with painted fingernails, counts money she collected from a gambler moments before, in Angeles city, north of Manila, Philippines, in this May 25, 2015 file photo.  REUTERS/Erik De Castro/Files