Emerging Markets Meet Tighter Money

The long era of quantitative easing made investors more willing to put their holdings in riskier places. Suddenly thats over

Emerging markets are suffering their worst slump since 2015. The MSCI Emerging Markets Index entered a bear market in early September after dropping 20 percent from its early 2018 peak. A benchmark index of emerging currencies has dropped more than 8 percent from its high on April 3, while the Bloomberg Barclays Emerging Market dollar-bond index is on track for only its second annual loss since the global financial crisis.

Argentina has made a desperate push to stabilise itself, raising interest rates to 60 percent. Turkey saw its stock market value tumble by $114 billion this year through August. India’s rupee slid to an unprecedented low this month, while Indonesia’s currency hit its weakest level against the dollar since the Asian financial crisis two decades ago.

While each country has its own challenges— Turkey’s president, for example, has unnerved investors by arguing that lower interest rates can pull down inflation—the U.S. Federal Reserve has played a key, if unintentional, role in triggering the stress. It’s all about the Fed’s campaign to move off its emergency policy settings dating from the aftermath of the financial crisis a decade ago.

With the American economy enjoying a strong upswing, the Fed has been raising interest rates. It’s also been unwinding its bond-buying policy, known as quantitative easing or QE, by not replacing all the bonds it owns when they mature. In effect, this is shrinking the outstanding supply of U.S. dollars. The Fed’s counterparts in Europe and Japan are simultaneously scaling back their stimulus programs. While the big three central banks pumped an extra $1.82 trillion into the global financial system from January through August 2017, this year the tally is just $99 billion.