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Speculation about the early tapering of quantitative easing by the U.S. Fed is pressuring emerging markets flows
Over the past six weeks, speculation on when quantitative easing will occur has brought the bond markets to their knees and caused a significant reduction in fund flows to emerging markets.
In the United States, high yield bond market issuance has dropped to 25% of the weekly volumes in early May, and fund flows have posted record outflows. Emerging market funds posted a record outflow in the last week of June, equivalent to 0.7% of assets under management.
On the bright side, Brazilian funds saw an inflow of $400 million in the last week of June, alleviating the pressure due to negative outflows. The market may have finally dropped enough to attract buyers again.
Additionally, a potential ending in sight to quantitative easing sent the dollar soaring, which caused a relative weakening of several currencies around the world. The Brazilian real was no exception, and we’ve seen its value drop almost 10% since early May. Of course, inflation concerns also played a role in the depreciation of the real.
If macroeconomic data in Brazil improves, including consistently lower inflation, perhaps the exchange rate will normalize and return to previous levels, though in the near term, this is unlikely.
Read on to explore the other items weighing down the market in Why Brazil’s equity market keeps dropping (Part 5).
© 2013 Market Realist, Inc.