Latin America Reacts to Changes in Fed Spending

Latin America has outperformed other emerging markets in attracting foreign investment. However, the significant liquidity of Latin American currencies means that Latin America is the “high beta,” abruptly reacting to what is happening in the US economy, suggests Krista Hughes for Reuters. The mere hint of reduced spending from the US Federal Reserve, signaling a potential rise in interest rates, led to a selloff of bonds in Brazil, Colombia, and Peru, as well as an average fall of 5.5 percent in the major Latin American currencies. Slower growth in China and the threat of recession in the US have already slowed growth in Colombia, Peru, Brazil, Chile and Mexico. Investors are finding it tough to wean themselves off the so-called stimulus funds. While financial stability in Mexico and Colombia and continued stimulus from the Bank of Japan might keep global liquidity ample in the face of the Federal Reserve’s changes, the rapid reactions offer a reminder of markets’ intricate connections and the effect on risk. – YaleGlobal