With the Fed looking to start the tightening cycle, the dollar has increased sharply and credit spreads have widened. This has led to a deteriorating of financial conditions in the U.S., as illustrated by the chart above, which could penalize companies by making borrowing more expensive and hitting exports.
“The
divergence between wider credit spreads and still-high equity
valuations suggests that a further worsening of financial conditions is
not fully priced in by the stock market,” they said.If this continues, the stock market could be in for a downturn, according to the SocGen analysts.
Potential slump ahead in EM bonds.
How will a Fed rate increase affect emerging markets? Many developing economies issue debt in dollars, and with a rising greenback, that debt becomes harder to service.
On top of that, emerging markets have suffered from the rout in commodity markets, China’s slowdown and a weaker global growth outlook. This has led to a sharp drop by several emerging-market currencies, but as SocGen points out, corporate credit spreads have not widened as much as the foreign-exchange markets have depreciated.
“Our EM strategists believe this may change, as redemptions should force reissuance next year,” they said.
Potential slump ahead in EM bonds.
How will a Fed rate increase affect emerging markets? Many developing economies issue debt in dollars, and with a rising greenback, that debt becomes harder to service.
On top of that, emerging markets have suffered from the rout in commodity markets, China’s slowdown and a weaker global growth outlook. This has led to a sharp drop by several emerging-market currencies, but as SocGen points out, corporate credit spreads have not widened as much as the foreign-exchange markets have depreciated.
“Our EM strategists believe this may change, as redemptions should force reissuance next year,” they said.
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