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EM Financial Conditions Easing After Sharp Tightening (1/2)

EMERGING MARKETS
MNI (London)

After reaching their easiest point in years in mid-late 2020 amid pandemic-related global monetary and fiscal stimulus, global financial conditions have tightened sharply since late 2021.

  • As major central banks attempt to tackle surging inflation, EMs have tightened to get ahead of other tightening cycles in order to avoid any further currency depreciation against the strong dollar, despite global recessionary fears looming.
  • The inflationary implications from the combination of weaker FX and higher imported commodity prices have forced EM policymakers to tighten even further, while waning global risk appetite has dragged down equities and widened credit spreads.
  • A look at the Goldman Sachs financial conditions index (the GS FCI - factoring in interest rates, currency strength and credit/equity markets) highlights a substantial tightening of financial conditions across major EMs since 2021 as central banks attempted to keep pace with (or front-run) the Fed’s tightening cycle and dampen inflation pressures.

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After reaching their easiest point in years in mid-late 2020 amid pandemic-related global monetary and fiscal stimulus, global financial conditions have tightened sharply since late 2021.

  • As major central banks attempt to tackle surging inflation, EMs have tightened to get ahead of other tightening cycles in order to avoid any further currency depreciation against the strong dollar, despite global recessionary fears looming.
  • The inflationary implications from the combination of weaker FX and higher imported commodity prices have forced EM policymakers to tighten even further, while waning global risk appetite has dragged down equities and widened credit spreads.
  • A look at the Goldman Sachs financial conditions index (the GS FCI - factoring in interest rates, currency strength and credit/equity markets) highlights a substantial tightening of financial conditions across major EMs since 2021 as central banks attempted to keep pace with (or front-run) the Fed’s tightening cycle and dampen inflation pressures.

Keep reading...Show less