Week In FX Asia - Outflow Of Funds From Emerging Markets To Continue

 |  Includes: EWJ, FXA, FXI, INR, UDN, UUP
by: Dean Popplewell

Outflows from emerging markets bonds and equities accelerated this past week, as expectations the U.S. Federal Reserve will start withdrawing stimulus measures as early as next month led global investors to "fold their bets on a larger scale." Investors are believed to have pulled just under $2 billion out of emerging market "equity" funds in the last week alone. That is more than double the amount that left the emerging market sector in the previous week.

In the bond category, it's a similar story. For the 13th consecutive week, investors continue to pull monies from the bond funds to the tune of $1.3 billion, just under double the $834 million that was liquidated the week before. Forex investors are very much shunning risks in the region and are happy to look at the USD in a more favorable light, which is supported by a U.S. yield curve that is backing up.

The fear that the Fed will begin tapering next month is making some investors worried that the "tide of money that has been flowing into the emerging markets over the past few years will diminish." The fear that "helicopter" Ben and his fellow cohorts will begin tapering as early as next month should continue to put outbound pressure on capital from the bond and equity funds in the emerging market. However, the outflow of funds is not on the same scale as what occurred in the region during late May and June. Investors pulled $37 billion from the region in June alone.

The forex market does not have the time to rest on its laurels. If anything, it needs to get a second wind and get ready for six consecutive weeks of event risks. In the U.S. we have tapering, the debt ceiling, and a new Fed chairman to be chosen. In Europe Chancellor Merkel has the German elections to contend with, and then there are Cyprus, Greece, and Portugal decisions to be made. In Japan PM Abe is pushing his third policy arrow, while trying to sidestep the emerging markets fallout. In the Middle East we have the Syrian civil war and Egypt to keep capital markets very much on its toes.