Saturday, 20 August 2016

Markets fall, emerging market debt "rings alarm bells"

Markets were mostly lower on Friday.

The S&P 500 fell 0.1 percent and the STOXX Europe 600 fell 0.8 percent.

US 10-year Treasury yields rose four basis points to 1.58 percent after San Francisco Federal Reserve President John Williams said the central bank’s September meeting is “in play” for a rate hike.

The US dollar gained 0.3 percent against the yen and the euro.

However, oil rose, with West Texas Intermediate crude rising 0.6 percent.

Emerging markets also slipped on Friday.

That should not be surprising. Bloomberg reported that global stock markets have become increasingly correlated.

And similarly for bond markets. As more bonds globally are trading with negative yield, investors poured more money into emerging market debt funds over the last week.

However, this means that a Federal Reserve rate hike could be problematic.

The Bank for International Settlements warned in a report on Thursday that “the high indebtedness of EMEs’ corporate sector rings alarm bells”. It noted that the “high level of corporate debt has contributed to overheating in some of these economies”.

It added that scheduled repayments are expected to rise sharply from 2016. This means that the refinancing capacity of highly leveraged companies is “likely to be tested soon, especially if the rise of the US dollar continues”.

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