The ‘extraordinary calm’ in markets... is cause for worry
Wall Street’s so-called ‘fear gauge’, or Volatility Index, currently stands at just 12.3 points, close to the record low of below 10 touched before the global financial crisis
Last week was one that investors in South African assets would rather forget.
The rand, South Africa’s currency and one of the most actively traded emerging market (EM) currencies, tumbled 9 per cent against the US dollar in response to president Jacob Zuma’s decision to fire his well-regarded finance minister, Pravin Gordhan, in a move which has plunged Africa’s largest economy into a full-blown political crisis and is expected to hasten the loss of the country’s coveted investment grade credit rating.
A little over three years ago, when developing economies were bearing the brunt of the fallout from the unexpected decision by the US Federal Reserve to scale back, or taper, its programme of quantitative easing (QE), a sharp sell-off in South African assets would have put the currencies and equities of other emerging markets under strain.
Correlations between the prices of financial assets across the world have fallen to their lowest levels since the global financial crisis
Yet this time round, financial contagion is nowhere to be seen.
On Friday, the day after Gordhan was ousted, Asian currencies even rose against the dollar while yields on Latin American local government bonds continued to decline. In the week ending March 29, when speculation about Zuma’s plans to fire Gordhan was mounting, net inflows into emerging market bond mutual funds surged to US$2.8 billion, according to JPMorgan, an eight-month high.
The absence of widespread contagion stems partly from the much stronger divergences in the performance of asset classes over the past several months, and particularly since the victory of Donald Trump in the US presidential election.
Correlations between the prices of financial assets across the world have fallen to their lowest levels since the global financial crisis as expectations of reflationary policies under the Trump administration accentuate divergences in monetary policies and, crucially, increase the importance of fundamentals and country-specific conditions in determining the performance of assets.
