Stock markets suffered heavy losses Thursday as the flight to safety accelerated after the minutes of the Federal Reserve’s July meeting were released. However, markets rebounded on Friday as investors rushed to buy lows, confirming that the cut alone is the reason for the market gyrations.
The Fed has hinted at winding up its $ 120 billion-per-week bond buying program, which could signify an early onset of policy tightening leading to an increase in the cost of funds and potential capital flight. emerging markets.
The Fed’s final minutes signaled that it would start reducing its quantitative easing before the end of the year, if the US labor market continues to recover, causing stocks to fall sharply and dollar gains.
A mini tantrum?
Was the market’s reaction to the Fed minutes on Thursday a mini tantrum? Not really.
Given the current market conditions, the sell-off is due to a combination of factors ranging from growing unease over the skyrocketing highs at which stock prices have soared, to uncertainty surrounding the timing and pace of the decline and increase. the number of delta cases. around the world.
There is no doubt that a sudden and significant reduction has the potential to lower asset prices across the world, leading to a flight of capital to safety.
Obviously, the Fed minutes make no hint at such a course of action.
Better be ready
Emerging markets had a tantrum in 2013 when the Federal Reserve suggested it could cut the [financial] asset purchases in times of crisis. A repeat of such events is unlikely this time around, as most countries have better fiscal positions and stronger reserves to deal with the fallout from a Fed tapering.
Rising oil prices combined with improved non-oil revenues have strengthened the fiscal and external positions of GCC countries, preparing them better for tightening US policy.
The GCC’s overall current account surplus is expected to increase more than five-fold in 2021 to reach $ 109 billion from $ 20 billion in 2020, according to the Institute of International Finance (IIF). The IIR has forecast that GCC’s hydrocarbon revenues will increase from $ 221 billion in 2020 to $ 326 billion in 2021.
The 2021 budgets in the six GCC states provide for significant fiscal consolidation. Fiscal adjustment is also based on improving non-hydrocarbon revenues through tax reforms.
While most emerging markets have learned from the previous Fed tightening, with strong fiscal and external positions and resilient credit ratings, GCC has the least reason to have a crisis when the Fed decides on size and size. the timing of its tapering.