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On Thursday, April 1, Robin Brooks joined Markus’ Academy for a lecture on “Emerging Markets: Taper Tantrum Redux?” Brooks is the Chief Economist of the Institute of International Finance.

Watch the full presentation below and download the slides here. You can also watch all Markus’ Academy webinars on the Markus’ Academy YouTube channel.

Executive Summary

  • Taper tantrum began in 2013 when Bernake floated the idea of adjusting monthly volume of purchases, shocking markets. This increased the 10 year yield and emerging market currencies started coming under pressure. The June FOMC meeting was a big hawkish shock to markets and the 10 year yield shot up. By the end of August, yield of treasuries were at 3% from 1.6% in May 2013. The end of the taper tantrum was the September FOMC meeting when the Fed did not taper and yields became contained. 
  • Financial markets in 2013 became very sensitive to data surprises. Explanatory power of data became more important in 2013 and positive data surprises became important for long-term yields. This is pertinent now because with the opening of the economy with COVID vaccinations, there will be positive data and increased data dependence. 
  • With the rising US long-term yields, risk of an overshoot in real interest rates is building. Inflation rate events are stable because real interest rates are rising so rapidly — should be cognizant of whether they will overshoot. Should distinguish between a strong post-pandemic growth with increased long-term treasury yields and instead look at 10y10y forward to estimate future yields. 
  • Tracking foreign investor flows to emerging markets shows that there was a huge drawdown in flows at the height of COVID shock. After news of the vaccine in the fourth quarter of 2020, there was a rebound in flows. Importantly, as yields have risen this year, flows to emerging markets have gone negative. Comparing scaled flows between Q1 & Q2 2020 and Q3 & Q4 2008 shows that EMs excluding China had a smaller negative flow during COVID compared to the outflow during GFC. In aggregate, the COVID shock was less severe. All EMs except Turkey, Poland, and Brazil were hit harder during 2008 than in COVID.
  • EMs can still have large currency devaluations if emerging market flows are not greatly negative due to account deficits. China, who had consistent inflows except in 2015, is an outlier in EMs. Pre-COVID, Argentina, Russia, India, and Thailand are hardest hit.
  • Some pre-existing conditions coming into 2021 look better than 2013. In particular, the speed of recovery will be faster because markets are much faster moving — less hot money into EMs. There is less real appreciation of exchange rates due to these lower inflows. China may be diverting flows away from non-China EMs because China is currently under-invested, putting pressure on other countries where foreign investors hold more assets.
  • Although emerging markets are better positioned now, growth in EMs has been struggling for many years. Some countries in EMs are pursuing activist policies to increase growth (i.e. Argentina, Turkey), which increases volatility of GDP growth.