Emerging Markets – Worse Than The 1998 Asian Financial Crisis

The emerging markets are one good indicator to the state of the global economy, like one canary in a coal mine. They are not performing well at all. China’s economic hard landing, the slide in oil and commodities are all heavily impacting the emerging markets. Consequently investors are losing faith in their ability to shore up currencies and stimulate their economies. In fact, as Bloomberg reports, this year’s emerging market stock market turmoil is already worse than in the same period in 1998’s Asian financial crisis. Emerging markets currencies are even worse and downright ugly.

SocGen’s Berg recently warned:

‘The rout in emerging markets could continue for some time, especially as the major global central banks have exhausted their ammunition in recent years, making it unlikely that they will rescue global markets this time around’

Emerging markets fall erase six years of gains

Let’s have a look at the emerging markets stock markets.

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The MSCI Emerging Markets Index above just closed the week at 709.19, that’s the lowest close since May 2009. More than $2 trillion has been wiped out from the value of developing-nation equities this year alone as the index slid 13 percent – the worst start to a year since data began in 1988. The drop has exceeded the 8 percent decline in the gauge in the same period in 1998 during the Asian financial crisis and the drop in 2009 amid the global financial crisis.

The EEM iShares MSCI Emerging Markets index shows a similar pattern, though I have annotated this a bit more than one above.

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On this chart we can see price broke its up-trend (green line on the chart) in July 2015. Of note this was just one month before China announced its shock currency devaluation that caused a worldwide stock plunge. The August plunge just acted to accelerate the sell off. Moreover, the rally towards the end of the year was much more feeble than that in Europe and the US. Price has already penetrated all the way back to 2009 and yet the MACD momentum indicator still has room to fall. On the MACD you can see that it turned back up towards the end of the year, but quickly aborted and has started heading lower again. This was a very negative sign and indicates weakness will persist.

Currencies flop

Consequently the turmoil was reflected in currencies. For example, Russia’s ruble that breached an all-time low of 81.10 per dollar and the Mexican peso fell to a record-low close.

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