The biggest causes for worry, bigger than a recession in Russia or the oil-price plunge: the slowdown in China, which has already upended commodity prices, and the likelihood U.S. growth will propel the dollar higher and suck assets out of emerging markets.
Sounding a similar alert, the Bank for International Settlements has warned an appreciating dollar could have a “profound impact” on the world economy. It estimates that international lending to non-financial companies totalled $9.5 trillion at the end of June. Claims on China alone have been growing at an annual rate of 50 percent to reach $1.1 trillion.
International Monetary Fund economists also reported this month that the frequency of sovereign debt crises is 15 percent higher at the start of a U.S. monetary tightening cycle.
“My long-standing view on EM currencies is that they could melt down because there has simply been way too much cumulative capital flows,” said Jen. “Nothing the EM economics can do will stop these potential outflows as long as the U.S. economy recovers.”