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Emerging Markets Hit By Share And Currency Sell Offs

Emerging Markets Hit By Share And Currency Sell Offs
Trade war tensions and a strengthening US dollar hit a majority of emerging markets with fresh sell offs in shares and currencies and Indonesia, Saudi Arabia and China were the prominent ones to be hit.
Concerns among global investors about the fate of emerging markets following the path of Argentina and Turkey and the impact of such an event on the global economy led to a drop in European shares.  
There were also concerns among investors about a fresh escalation of the US-China trade war with the possibility of the US imposing another fresh round of tariffs on Chinese goods worth $200 billion which can be ascertained as soon as this week. there are also concerns of weak growth in the service sector in China and the news of a recession in South Africa.
The emerging markets found it harder to serve their dollar dominated debts because of a further strengthening of the dollar which was coupled with a fall in commodity prices – primarily lead by crude oil.
“People are looking closely at what’s happening in emerging markets, at the trade war and the fact that the United States is likely to implement another wave of tariffs against China. If you look at global growth, more and more signs are that it will slow in coming months”, Christophe Barraud, an economist at the Paris-based brokerage Market Securities, told the media in an interview.
The dollar has also been strengthened by constant raising of interest rates by the US Federal Reserve and economists are concerned that the outcome of this for the developing countries could be at the same level as the 1990 crisis in the emerging markets when there was a series of economic crisis in the developing economies because of strict monetary policies of the Fed which was then headed by Alan Greenspan.
The return on investments by investors in the markets have been suppressed by the very low rates of interest that have been prevalent in the developed markets since the 2007-08 economic crisis which prompted them to shift focus of investing in the emerging markets in hope of greater returns.
“It has certainly been a terrible trading week thus far for most major emerging market currencies as investors begin to compare the ongoing pressure to the 1997 Asian financial crisis”, said Lukman Otunuga, an analyst at the currency broker FXTM.
A weak currency results in enhanced import costs for a country that in turn causes an increase in inflation. This was evident in the rising inflations rates in the United Kingdom following the weakening of the pound after the Brexit referendum. But when a central bank and governments undertake policies that are aimed at controlling the cost of living, it can lead to negative impact on the economic growth of the country because of stricter austerity measures and less spending by the government and increases interest rates. This means that while there is less economic activity of the government, private investments also slow down because of higher costs of debts which leads to a slowdown of economic growth. This is what is a cause of concern for global investors with respect of a number of emerging economies.

Christopher J. Mitchell

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