The US Federal Reserve finally pulled the trigger on December 18 and announced it will start tapering its $85bn-per-month bond-buying programme in January. While US markets sailed through, many emerging markets like Turkey are set for a rougher ride.
The US central bank has finally done what it hinted at in May, announcing will start reducing quantitative easing from next month thanks to signs of improvement in the economy. However, the programme will only be trimmed by $10bn per month at first.
Emerging markets have been on a roller-coaster ever since the first hint was dropped. Last year, the programme sent investors flying to riskier assets in the hunt for better returns, and that saw bond yields across Central and eastern Europe falling to record lows. However, the uncertainty over the timing of the tapering has kept markets on their toes throughout 2013.
In New York, despite fears the stock market would crumble at the first sign of actual tapering, the Dow Jones Industrial Average rallied 1.8%, to its biggest gain since early October, taking it to a new all-time high. That stands in stark contrast to previous episodes when the Fed suggested it may be ready to turn off the tap. "Taper tantrums" in May and August saw the same index drop 4.9% and 5.6% respectively.
On the one hand, the limited volume of the tapering is seen as offering solace, while the Fed's reiterated commitment to keep interest rates low also helps. On the other, markets are likely to take relief from the fact that the uncertainty is reaching an end, and that signs of recovery in the world's biggest economy will soon no longer be met with dropping markets.
"We stick to our belief that the Fed letting the cat out of the bag is good for EM," write analysts at Commerzbank.
"Generally I think it is good to have got tapering out of the way, pre Christmas," adds Tim Ash at Standard Bank. "The market was probably getting in more of a state over the uncertainty over tapering than the actual taper itself. Now it should be able to move on."
However, that will be easier for some than others in CEE. The reduction in the supply of finance will hit those with poor finances and/or imbalances in their economies more than others.
That means the Central European economies, as well as Russia, appear well set to weather any storm. Into Southeast Europe things get trickier, with the likes of Serbia and Croatia looking vulnerable. Turkey and Ukraine are the obvious candidates to face the most pain.
However, Ukraine, in the midst of potential revolution and having just agreed a financing deal worth billions with Russia, is watching its yields go down rather than up. That leaves Turkey to face the music.
The lira has weakened to 2.0592 to the dollar, it's lowest since early September, reports Bloomberg. "Turkey, and the lira's, problem still is the current account deficit, a wide external financing gap, a central bank that is kicking and screaming to avoid narrowing the gap by hiking policy rates and slowing domestic demand that much as we head into a busy election year," notes Ash.
The Commerzbank analysts suggest that apart from Turkey, "in the immediate term, EM assets are unlikely to jump to any conclusions too quickly before the Xmas break." They add that, like the US equity market, the fact that tapering has finally started should actually buoy emerging markets.
"We need to see what US [Treasury] yields do in the coming days," they note. "After markets return from the Xmas break, we should start to see new money flows into EM, which were waiting for the Fed to act, and which should help trigger buying pressure and a good start to the new year for EM."
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