When Janet Yellen and the rest of the Eccles cabal decided to stay on hold in September, the ‘new’ reaction function was all anyone wanted to talk about.
Of course, the idea that the Fed was to that point ‘data dependent’ (versus market dependent) was something of a joke in the first place, but the specificity the FOMC employed when referring to global financial markets still took some observers off guard. The worry for the Fed revolved primarily around the possibility that a hike could accelerate EM capital outflows at a time when a series of idiosyncratic factors (like a civil war in Turkey, a political crisis in Brazil, and the 1MDB scandal in Malaysia) had already pushed the emerging world to the brink of crisis. Enormous outflows from China as a result of the yuan deval didn’t help.
In short, the theory was that even a ‘symbolic’ 25 bps hike had the potential to trigger an EM exodus that would make the taper tantrum look like a walk in the park as a soaring dollar exacerbated an already tenuous scenario playing out across the space.
Now, as we look back at Q2 and Q3, we learn that all told, well more than a half trillion in capital fled EM over six months.
Here’s JP Morgan who calls the capital flight “unprecedented”:
This post was published at Zero Hedge on 11/09/2015.
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