Emerging Market Risk Ahead Amid Higher Borrowing Costs, Lower Liquidity

Negative sentiment in Asia and Europe is casting a pall on U.S. stocks on Friday. This negative tone is expected to linger as investors remain jittery ahead of the G-7 summit that kicks off in Canada’s Quebec later today.

Despite the expected weakness, many investors are embracing the sell-off after a seven session rally in the major indexes. They feel that stocks were getting a little pricey at current price levels. They were also worried about the risk of buying so close to all-time highs, given the re-emergence of geopolitical, interest rate and economic risk.

Concerns surrounding trade and relations between the U.S. and other nations, including its allies, is likely to be present at the start of the conference. This is helping to weigh on investor sentiment, leading to the call of a “risk-off” trading day.

In other news, also keeping to keeping investors on edge are the upcoming talks between the United States and North Korea scheduled for June 12.

Higher Borrowing Costs, Low Liquidity Could Bring Pain to Emerging Markets

Just like credit fears in Italy last week drove equity investors to the sidelines, some investors are saying that similar problems may be developing in emerging markets. Some traders are saying that investors should start watching debt yields in countries like Brazil now that the European Central Bank is considering pulling in its stimulus.

On Thursday, the exchange rate between the Brazilian Real and the U.S. Dollar jumped 1.5 percent as investors began to bid up the price of American debt. According to one interest rate strategist, “There’s been chatter about Brazil and some hedge funds shorting the dollar, trimming their exposure there. It’s very speculative.”

For a number of years, the emerging markets had benefited from historically low interest rates because of the massive amounts of liquidity the major central banks had pumped into the global economy. Most well-established economies used the excess capital to shore up their economies after the global recession hit about 2009.

The emerging market nations were expected to do the same. However, those countries that are still struggling may have to face the music sooner rather than later that the days of low borrowing costs and high liquidity are going away. They are going to be in for a world of hurt because several countries like Brazil still have fragile economies.

The U.S has been pulling liquidity out of the markets for close to three years. Now the European Central Bank is set to reveal its plan to do the same. There’s still time for a few of the emerging markets, however, time is running out and they are going to have to come up with a plan to deal with higher borrowing costs and low liquidity or start preparing for a boatload of pain.