Fragile five have most to fear from Fed taper talk

At the start of the summer, we believed that improving advanced economy growth – from the UK, US and Europe – would offset any slowdown in emerging markets.

Fragile five have most to fear from Fed taper talk


As we approach the final quarter of the year, this theme remains in place.

Risk markets stalled in August, with Syrian brinkmanship adding to investor uncertainty, but have since been supported by more positive data and a commitment from central banks to keep interest rates low.

Global overview

Our view on global economic growth remains that we are on track for slow and steady growth this year, now with a greater contribution sourced from advanced economies. Tapering of US asset purchases by the Federal Reserve is likely to proceed cautiously this year, with higher government bond yields reflecting better global growth as much as withdrawal of asset purchases.


In the US, pent-up demand, decreased economic uncertainty and evidence of stronger new orders is expected to boost capital expenditure. US treasury yields and corporate bond yields have moved higher of late, but the difference between the two has narrowed.
Rising US treasury yields are correlated with stronger GDP growth, as is a narrowing of corporate spreads. Janet Yellen is the likely successor to Ben Bernanke as Federal Reserve Chairman, and she is expected to follow current Fed data-dependant policy with, if anything, a more dovish attitude to monetary policy.


The eurozone beat consensus growth expectations in the second quarter as restocking of inventories boosted growth. The eurozone is expected to continue to gradually recover, with Germany growing and the contraction in peripheral demand easing. The post-election attitude of Germany is likely to be relatively unchanged, with a bias towards a more supportive stance on a eurozone solution.


Data releases from the UK continue to please investors. Post-recession endorphins have been boosted by easy credit conditions, rising house prices and Mark Carney’s forward guidance that rates will stay low until explicit conditions are satisfied.Consumer spending has grown over the past year and there is potential for further improvement ahead. We expect an improvement in productivity to keep unit labour costs contained, allowing headline inflation to drift back towards the Bank of England’s 2% target.

Emerging markets

Federal Reserve tapering discussions sparked currency stress in pockets of emerging market economies running current account deficits. Termed the ‘fragile five’, South Africa, Indonesia, Turkey, Brazil and India are most at risk because of external funding requirements. Keeping things in perspective however, the majority of the largest emerging markets do not face funding challenges, and those that do are still in much better shape than in the 1990s during the last emerging market crisis. Furthermore, external demand should be more supportive for emerging market growth in 2014.



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