So unless you have been hiding under a rock you have seen that US president Donald Trump pulled the USA out of international nuclear deal with Iran. This extreme move was not completely unexpected given Trump years of criticism and general hatred of Obama. The move has increased risk in the middle east, jeopardized US relations with allies and reintroduced oil supply concerns. All in a days work for this US president that thrives on disruption and drama. Reaction in the markets was broadly muted as the move was already priced in. Oil prices climbed marginal with brent hitting a 3 plus year high at $77.10 while US 10 year yields just below 3.0%. The event was felt a bit more in FX were politically risk currency were sold-off. TRY reached a record low against the USD as Trump move threated stability of boarder, access to oil and highlighted Turkey own political and monetary uncertainty. Argentina ARS currency crisis continued. Banco Central de la Republica Argentina has raised interest rates 1,275bp in two weeks (40%) and requested support from the IMF. Worryingly for Argentina which is heavily funding in USD spent over $5bn to temporarily support the peso. We might now yet be in period as volatile as the “taper tantrum” however, rising USD Interest rates and extreme geopolitical uncertainty are the key ingredients to deeper EM sell-off. Extend period of lose monetary policy did not just create bubble in development market equites but embolden EM carry traders to overlook crucial fundamentals risks. This unwind is not likely to let up anytime soon.
By Peter Rosenstreich