Fate of emerging markets is intertwined with US Fed’s actions

Updated: Monday February 3, 2014 MYT 8:05:37 AM

Fate of emerging markets is intertwined with US Fed’s actions

BY YAP LENG KUEN

LIKE it or not, the fate of the emerging markets is intertwined with the actions of theUS Federal Reserve (Fed), which has been a big-time player in providing liquidity via its bond purchases.

Now that the Fed is into its monthly bond withdrawals, the finger is being pointed at it for the emerging markets’ fall-off.

But is that enough to convince it to reconsider its action?

“Weakness in emerging markets and mixed US economic data have driven US stocks down a somewhat paltry 4% or so from recent highs.

“While that leaves Wall Street lower than it was when the Fed commenced its quantitative easing rollback in December, there is little reason to believe it will prompt the US central bank to stage an abrupt about-face, especially at Ben Bernanke’s farewell rate-setting meeting,” wrote James Saft in his column for Reuters.

Perhaps the Fed, having such an overwhelming presence in financial markets worldwide, should not just consider US recovery interests.

‘’While that would immediately ease funding and market conditions for emerging markets, it would cost the Fed much in credibility, especially after it twice surprised investors in September and December about the timing of the taper,” said Saft.

If the situation has become so dire, then it may be wiser to throw credibility to the wind and extend a lifeline to these struggling markets, which have been a helpless dependent on US stimulus funds.

Japan’s economic recovery will no longer be just tagged on the weak yen lending support to exports.

Pointing to a raft of economic reforms to place the economy on a more sustainable path, Prime Minister Shinzo Abe wrote: “I am confident that the combined effect of these reforms will enable Japan to change its economic landscape dramatically.”

Reforms range from those in electricity supply, healthcare, agriculture, housing development and corporate taxes to the labour market, and are highlighted in hisProject Syndicate column in The Guardian.

A vibrant Japan will help to stabilise Asian economic growth, especially in tough times of emerging markets’ sell-off.

Following the 2008 financial crisis, global bank regulators have struggled to find a valuation benchmark, especially for derivatives.

Global regulators are planning the world’s first common rule within three years to value hard-to-price assets held by banks, said Reuters.

A task force of regulators, standard setters, rating agencies and accountants have been set up to look at big variations in values and the pricing methods used.

Difficult as it may be, the task of developing a benchmark to value derivatives should be carried out.

There are markets that are focusing on derivatives, and these benchmarks will be useful to them.

Columnist Yap Leng Kuen is observing how a big fish like the Fed controls the other small fishes.