NEW YORK : Emerging markets are facing their demons as traders mull whether U.S. Federal Reserve interest rates will rise as high as 6 per cent, a level that could kick weaker countries when they're down, while diverging global growth paths and China's reopening might cushion some of the blow for the bigger ones
Expectations for where the Fed's terminal rate would peak have been rising at breakneck speed: Markets are pricing in a 5.5 per cent-5.75 per cent range for September, while the CME FedWatch tool shows a near 50 per cent chance for the band to hit 6 per cent that month.
"Fed tightening towards 6 per cent would firmly test historical 'pain thresholds' for emerging market assets," said UBS strategist Manik Narain in a note, predicting India's rupee, China's yuan and the Philippine and Chilean pesos could weaken as much as 5 per cent if the Fed ramped up rates to 6 per cent.
The number of smaller, riskier emerging markets where investors demand a premium of 10 per centage points or more over safe-haven U.S. Treasuries has remained broadly steady at around 30 countries, with a recent rally bringing no relief, analysts at Tellimer found. These countries, which include Kenya, Egypt and Pakistan, are essentially locked out of capital markets.
Investors, especially on the equities side, could see China's reopening somewhat offsetting a looming downturn in the United States and some of Fed rates' historic weight on emerging markets.
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