The emerging market and commodity currencies took a deep breath as the Fed refrained from stepping out of its long-lasting zero rate policy. The volatility in the global financial markets and the IMF warnings proved to be influential. The Fed admitted that the global rout in commodity and energy prices could rise the downside pressures in inflation. Although the FOMC confirmed that the global inflation outlook has not changed significantly.
We are now shifting toward a higher dimension in data monitoring. The US data will be watched and matched to global data set. The inflation in China and the unemployment in the Eurozone will be as important as onion prices in India and dairy product sales volume in New Zealand. Given the dull economic fundamentals across the globe, it may be hard for the Fed to take the first step before the end of the year. It will be even harder for the market to assess a consensus and to come up with expectations. Fasten your seat belts, a period of high turbulence is right ahead.
Guest post by Ipek Ozkardeskaya, Market Analyst, London Capital Group
Of course the loose Fed policy is not enough to kick off the economic growth in the emerging markets per se, but at least it gives a relief to their financial markets after weeks of aggressive sell-off.
In the FX market, the high yielders could finally breathe. Among the happiest, we cite the lira, the rand and the rupee. The extended period of lower US rates – hence contained USD appreciation – buys time for central banks and companies holding large foreign exchange debt in their balance sheets. In term however, the thick layer of ambiguity around the Fed will only guarantee choppiness in currency trading.
We could expect to see divergences within the EM and commodity complex before the end of the year.
Overweight INR, Underweight TRY and BRL
The exhaustion of the post-Fed appetite should witness a new set of short-term parameters. In the light of idiosyncratic economic and political challenges, we overweight INR and maintain our negative bias in BRL and TRY.
Borsa Istanbul stocks advanced to 75000 mark on speculation that the Central Bank of Turkey will sit on its hands at next week’s meeting. The correction should find support at 73700 level (Fib 61.8%) for an extension of gains to 75’320 (September highs). As the November 1st snap election approaches, the political and social unrest are the major downside risks for Turkish markets. Traders are expected to play via short-term positions. Hence the market volatility is expected to remain high.
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