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Emerging Markets and Tapering

The Emerging View

26 July 2013

Federal Reserve Chairman Ben Bernanke’s announcement that Quantitative Easing (QE) will be scaled back carries enormous symbolic significance. The commencement of tapering marks the first reduction in the pace of monetary easing in the United States since the crisis began in 08/09, but the market has been keen to extend the logic well into the realm of monetary tightening. The US treasury market now prices hikes by early 2015. The turning point thesis has even been extended beyond the US treasury market. Many now allege that the ‘Great Rotation’ is upon us, the US Dollar is going to soar and Emerging Markets – their rise constituting the single most important change in the global economy over the past three decades – are predicted to decline. But is this really a meaningful turning point, beyond its purely symbolic significance? Highly symbolic events make for excellent stories and excellent stories can drive markets. A risk-averse and structurally impaired world navigating uncharted waters of abundant liquidity using untested policies is perhaps particularly inclined towards the melodramatic. Indeed, it is not so long ago that another powerful idea seduced the market, namely the break-up of the Eurozone. Like the idea of the great rebalancing, the Eurozone idea was also seductive, highly tradable, grand in scope and completely wrong. Europe went on to expand its membership rather than break up. Once-strongly voiced calls for imminent EUR-collapse are now barely heard in whispers.

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