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At a time when the U.S. Federal Reserve has well and truly capitulated on its hiking path, some emerging markets are not showing signs of relief.
Argentina's peso is close to an all-time low, the Turkish Lira is teetering close to its year-to-date low again and the South African rand is creeping back to December levels.
Where would those currencies be in a world where the Fed was still tightening, dare I ask? A higher interest rate in America is seen as detrimental for emerging markets as U.S. investors bring their dollars back home with the higher yields.
A dovish Fed may have taken the pressure off emerging markets, but investors have now become more attuned to the mantra that not all of these economies are cut from the same cloth. In fact, the currencies that have suffered this year are not only the countries with high external dollar liabilities, but also happen to be the ones facing the softest growth conditions.
Argentina is in the depths of a recession having contracted 6.2 percent in the last quarter of 2019 as President Mauricio Macri grapples with high levels of inflation and pressure from the International Monetary Fund to implement austerity measures. All of this ahead of an election later in the year.
Turkey is also in the midst of stagnation. The economy contracted 3 percent toward the end of 2018, inflation is just shy of 20 percent with pass-through from the currency after the lira depreciated 30 percent in 2018.
Analysts have labeled the local elections this past weekend as a referendum on President Recep Tayyip Erdogan's policies, but one trader told me that either way "we are likely to see more volatility as locals continue to buy dollars and are worried about the growth outlook."
Robin Brooks, the chief economist at the Institute of International Finance, wrote in a note last week that beyond politics, "markets would like to see a shift in the growth model: away from a credit-dependent model towards a more sustainable one," adding that one cannot assume Turkey is an isolated event as investors become increasingly wary of financing countries that are too heavily indebted/credit dependent.
2018 was a year that saw the world shaken up by a confluence of factors: tightening financial conditions, a slowing China, a global trade shock and financial market instability.
With optimism about a China-U.S. trade deal, the Fed turning dovish as well as more positive data out of China over the weekend, one could say that the worst is behind us. But what if the worst has merely been postponed as indebted countries have not used this time to repair their growth composition? Turkey is a good litmus test.