Dark clouds form in emerging markets

Investors had been returning to emerging market assets in the second quarter and earlier in the third this year, but new data from the Institute of International Finance show a strong reversal that rivals the outflows seen after the 2013 taper tantrum and the 2015 Chinese currency devaluation scare.

Driving the news: JPMorgan strategists said they sold out of some EM assets ahead of expected uncertainty caused by the U.S. presidential election, adding that the president's coronavirus diagnosis could pull forward volatility.

The recovery: IIF estimates EM securities attracted around $2.1 billion in September, up from $0.7 billion in August.

• EMTA, the Emerging Markets Trading Association, reported earlier this week that EM debt trading volume in Q2 stood at $1.31 trillion, an 8% increase from the same period in 2019, while down 12% from $1.49 trillion reported in the first quarter of 2020.
• Local currency debt, which is considered riskier, also saw an increase from 2019 figures, rising 16% in the second quarter from the same period in 2019.

The relapse: IIF economists have seen a "fresh bout of market turmoil," arising in trading activity in recent weeks due to uncertainty about the U.S. election, a rejuvenated dollar and lingering questions about COVID-19.

• The data found high-frequency outflows from EM in the final weeks of September that rivaled the taper tantrum and devaluation scare, two of the biggest negative events in modern history for EM, and some countries are seeing selling pressure continue to build.