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Prospects Weekly: A sell-off in both developing and high income equity markets, The current account balances of developing countries have declined in recent years, The outlook for grain markets has improved

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The last four weeks saw a sell-off in both developing and high income equity markets, partly reflecting uncertainty arising from indications that the U.S. will begin tapering off its quantitative easing. The current account balances of developing countries have declined in recent years, due to a rebalancing in China, increased imports by oil exporters, and weak trade performance. This, coupled with lower capital inflows relative to the pre-crisis period (as a share of developing country GDP), has eaten into developing-country reserve positions. The outlook for grain markets has improved, particularly for maize, while wheat and rice markets remain well supplied.
A sell-off in global equity markets since late May. Extraordinary monetary policy steps by the US Federal Reserve, the ECB, and Bank of Japan had helped to fuel a rally in global equities since mid-2012, led by high income countries. But increased indications that the US will begin tapering off its $85 billion/month in bond purchases toward the end of the year, has provoked a 5.4 and 7.4 percent decline in high-income and developing country stocks since May 21. Japanese stocks, which surged after monetary stimulus plans, suffered the steepest decline (-19%). Nevertheless, Japanese and overall high income stocks are still up 22 and 11 percent year-to-date. The sell-off in developing equity markets, which were already trailing high-income stocks in 2013 due to weak growth outturns, has caused them to decline 6.4 percent year-to-date.
The current account balances of developing countries have declined in recent years. The combined balance declined from a 3.1 percent of GDP surplus in 2007 to -0.1 percent deficit in 2012. This partly reflects a rebalancing and currency appreciation in China, whose surplus fell from 2.5 percent of developing country GDP to 0.9 percent in 2012. The surpluses of oil exporters also fell (from 1.6% to 0.5%) in part due to increased imports. Deficits in oil importers, excluding China, rose (-1.0% to -1.5%). Among developing countries that had deficits, the overall deficit rose from 1.6 percent of developing-country GDP in 2007 to 1.8 percent currently. Weaker current account positions and sharply lower capital flows as share of developing country GDP (despite recent strengthening) has resulted in weakening of reserve positions. Excluding China, developing-country international reserves declined from the equivalent of 10.2 months of imports in January 2010 to 8.5 months by March 2013.
Improved global grain outlook for 2013/14—with upside price risks. The U.S. Department of Agriculture confirmed an improved outlook for the 2013/14 grain crop on expectations of normal weather conditions. Global maize output is expected to increase 12.5 percent this year, causing a marginal increase in the stock-to-utilization ratio (S/U) to 16.2%. Wheat production is expected to rise 6%, but because of increased consumption, the S/U ratio will fall slightly to a still comfortable 26.1%. The rice market is well supplied (S/U ratio of 22.8%). Price risks are on the upside for maize and wheat (if delayed plantings in the US affect yields); rice price risks are on the downside, depending on whether Thailand decides to release its publicly held stocks.