EM: Populist strong men and weak currencies - AmpGFX

In view of Greg Gibbs, Analyst at Amplifying Global FX Capital, a key factor in undermining financial conditions in vulnerable EM markets was the recent upheaval in Italian politics. 

Key Quotes

“Like Brazil, Mexico and Turkey, where elections are coming soon, Italian asset markets were befallen by populist politicians embarking on unsustainable fiscal spending.”

“Luckily for Italy, at least for the time being, it has the direct support from ECB asset purchases, which have probably prevented a worse outcome.”

“The parallels in the USA should not be ignored.  While US financial markets are strong, it too has a populist government that has succeeded in blowing out its fiscal deficit with no plan and little hope of reigning it in any time soon.”

“While the Fed is tightening policy at the moment, it is arguably complicit to the government excess.  It has made little comment on the sustainability of US government finances.  US President Trump arguably dumped the previous Fed Chair (Yellen), to replace her with one (Powell) that, to get his job, had to hold his tongue when commenting on US fiscal excess.”

“The US fiscal and external position is hardly any better than some of the more vulnerable emerging markets.  It is fair to say that the USA is relying on its reserve currency status and the dollarisation of global financial markets to provide it stability.”