STOCK MARKET WATCH -- Monday, 3 February 2014

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31. Emerging-Market Rout Seen Enduring on Low Real Rates

http://www.bloomberg.com/news/2014-02-02/emerging-market-rout-seen-enduring-on-low-real-rates.html

Inflation-adjusted interest rates are still too low in developing nations for Citigroup Inc. and Goldman Sachs Group Inc. to foresee an end to the worst emerging-market currency selloff in five years.

One-year borrowing costs in Turkey are 3.6 percent, less than half of the average in the three years before the 2008 global financial crisis, even after the central bank doubled its benchmark rate last week, according to data compiled by Bloomberg. The real yield for Mexico is almost zero, while South Africa’s is 1.4 percent, compared with an average of 2 percent over the past decade.

Central bank rate increases in Turkey, India and South Africa last week failed to contain January’s 3 percent selloff in emerging-market currencies. Citigroup says yields aren’t high enough to attract the capital needed to finance current-account deficits in some of those nations. Competition for capital is intensifying with the Federal Reserve paring monetary stimulus, while the International Monetary Fund is calling for “urgent policy action.”

“When you have low real rates and try to finance your current-account deficits, it usually won’t work,”Dirk Willer, a Latin America strategist at Citigroup, the second-largest currency trader, said in a phone interview from New York on Jan. 31. “If the U.S. is repricing for higher rates, it’s very difficult for you to get away with lower rates. South Africa and Turkey are not safe yet.”