Let`s all be clear folks, some problem or another in an emerging market (EM) economy these days, will always led to contagion elsewhere. The interconnected nature of EM fund investment (the driving factor in many exotic markets) ensures that local problems can no more remain local. In turn, when stock markets in the west are at or near all time highs, then the catalyst for a fall can often be unlikely. It is not a question of whether or not a fall in the value of the Argentine peso, or a fall in Chinese manufacturing activity SHOULD have affected the value of the FTSE 100(for example); record high indices dramatically increase the sensitivity of markets to any external shudder – no matter how far flung it may be!
Make no mistake though, last week is almost certainly not a blip. Once these seeds of doubt – more often than not historically, sown in EM countries – start to germinate, the effect can become short term, increasingly toxic; perhaps a little illogical at times, but nonetheless real. Communication of unrest breeds more unrest, and as a world if there is one thing we now do incredibly well, it is to communicate! Regrettably, with human nature being as it now somewhat depressingly is, we have developed a tendency to be easily discomforted, and we thrive on being fed a diet of fear. So nervousness and doubt are communicated with much more vehemence than good news. Take the situation the Fed is in. Deciding to taper should have been good news – as a sensible step away from crisis measures, because the economy had achieved considerable progress – it certainly should not have been `a shock` (how could it ever have been a shock??) and by its sensible gradual implementation, it did not have global implications. Now, it is at the forefront of the most widely quoted `reasons` why EM stock markets are lower, and it unfortunately makes this week`s FOMC decision even more controversial!
For the Fed to pander to this sort of nonsense would be wrong. The Fed are in the process of (belatedly) dismantling emergency measures in response to a global banking crisis. They should continue to do so at a pace set by their future expectations of health in the US economy… HOWEVER. This week is not a time to feed our growing need for uncertainty and fear by reigning back its programme. To do so would be to feed the world more doubt about the strength of recovery in the US, and we really don`t need that! Even if the recent economic numbers have not been as robust as hoped for, even a couple of months ago, it would certainly not do any great harm to cut another portion off the QE cake now.
This is a time for policymakers at the Fed to think deeply about how their actions will be construed beyond their borders. I think for the Fed to be cautious and hold off this week, would be a mistake. How big a mistake, we don`t know. External events such as we have seen in Argentina, are beyond the reach of the Fed. They did not cause it, but by instilling a vote of confidence and stability in the health of the recovery in the US economy this week, the Fed can certainly do something to alleviate an underlying disquiet and nervousness in markets worldwide. This is an ideal opportunity for the Fed to take a strong lead, be bold and do something significant to stabilise a nervous global economy.
