EMs under pressure from global factors

After a bit of a reprieve in the early part of July, Emerging Market (EM) assets have continued lower. The pattern of weakness since April has largely remained the same with stability in hard currency bonds, weakness in local currency bonds (driven mainly by FX) and weakness in equities. 

Global factors are behind the renewed pressure in EMs, markets have aggressively repriced Fed rate hike expectations following the July FOMC and commodity prices have continued lower aided by weakness in China data amidst an ample supply outlook. 

Investor flows into EMs have seen a strong reversal recently. After some stability in July, both equity and bond markets (hard currency and local currency) have experienced concurrent outflows. The performance in EM FX largely reflects these global factors. 

"The rise in US rates and the USD will continue to pressure vulnerable EMs, this favours Asia FX markets versus those in EMEA and LatAm. Commodity exporters (eg, RUB, BRL and COP) are notable underperformers as commodity prices have declined", says Barclays. 

In local currency bond markets, the selloff in EM rates (increase in yields) has been sharper than the movement in equivalent maturity UST bonds. The weekly change in 5y EM local rates has been larger than the movement in 5y UST adjusting for movements in 5y CDS and realized inflation, most countries lie above the 45 degree line.