Fed provides breathing space

(MENAFN- Khaleej Times) The Federal Reserve's surprise decision to refrain from scaling back monetary stimulus provided a respite to investors in emerging markets, where currencies are in the midst of their worst rout in two years. "It gives everyone some breathing time," Denise Simon, an emerging-market fixed income manager at Lazard Asset Management, which oversees $147 billion, said by phone from New York. "It certainly takes some of the immediate pressure off the more vulnerable countries. Emerging markets will continue to correct on the upside as the result." Fed Chairman Ben S. Bernanke held back from paring monetary stimulus to support economic growth, soothing investors who had dumped emerging-market assets since May as higher US interest rates sparked capital flight. A group of the 20 most traded emerging-market currencies lost 7.4 per cent between May and August, the most in two years. The decision came at a time when economic data from China to Brazil are showing signs of improvement and helps countries most dependent on foreign financing such as Brazil and India, said Simon. The yield on the benchmark US 10-year note fell 16 basis points, or 0.16 percentage point, to 2.69 per cent on Wednesday and was little changed on Thursday, making higher yielding emerging market assets more attractive. "This has created a much better environment for risky assets," Paul Denoon, who oversees $25 billion as the head of emerging-market debt at AllianceBernstein Holding, said in a phone interview from New York. "It's important because one of the concerns for the market is the large external financing needs for developing countries. This creates stability." Strategists at Citigroup on Wednesday advised clients to buy the Mexican peso and bet 10-year interest-rate swaps will fall, saying the Fed's decision boosts investor risk appetite. Brazilian state development bank president Luciano Coutinho said he expects currency volatility to increase because the Fed didn't start tapering. "For us, the sooner it starts and ends, the better," Coutinho said in an interview at Bloomberg's headquarters in New York on Wednesday. "I would rather see it start today and have some date to finish because then we will feel the whole impact. The worst thing is the uncertainty." Bernanke first signalled on May 22 that policy makers could reduce the bond purchases, triggering capital outflows and a selloff in emerging markets. More than $50 billion has left global funds investing in emerging-market bonds and stocks since May, extending the outflow this year to $11 billion, according to data from EPFR Global.