Emerging Markets Crisis Ahead

EMERGING MARKETS Emerging Markets Crisis Ahead

Markets snapshot

· Nothing new from the ECB

· Decent US employment report

· US Dollar bull trend remains intact

· Emerging markets are looking increasingly vulnerable

After a Reuters report earlier in the week claiming that 7 to 10 council members were against US style QE, there were quite a few who were wondering how Mario Draghi could appease the markets. Draghi subsequently promised that the ECB will increase its balance sheet by up to €1 trillion and the only way he can do that is to buy Sovereign bonds (US style QE). In the end, although there was nothing new from the ECB, Draghi does seem to have the unanimous support of the council in using any policy necessary to achieve their aim of increasing the balance sizeably.

So the bulls were pleased to know that QE (US style) is probably coming. However, without any commitment on the exact size of QE and the timing, bond and equity markets were unimpressed with EU stocks down 1.5% for the week. Italian and Spanish equity markets were down over 3% and their 10 year bond yields rose a few basis points.