|The US Federal Reserve’s decision to delay the unwinding of its quantitative easing (QE) program has boosted global financial markets. This has further strengthened developing-country currencies and equities, which were already recovering some of the value lost in recent months after speculation about QE began in May. Developing-country business sentiment indicators improved in August, in line with indications that activity is mending following several weak months. Oil prices declined around mid-September but prices remain elevated.|
|Global financial markets gained value following the decision by the US Federal Reserve to postpone the withdrawal of quantitative easing in September as had been expected. Pressure on developing country asset prices and currencies had already begun to reverse in mid-August. But the strengthening trend intensified following the Fed’s announcement. Since the announcement, the MSCI Emerging Market Index rose 2.6 percent, with some benchmark indices gaining as much as 6 percent (Turkey). Developing country currencies also appreciated vis-a-vis the US dollar, up by 2-4 percent in India, South Africa, Brazil, Indonesia and Turkey. While the respite is welcome, risks and uncertainty remain particularly in countries with large external financing needs and pressures are likely to reemerge when talk of an eventual taper returns.|
|Business sentiment in developing countries is improving, with some exceptions. Manufacturing Purchasing Manager Indices (PMIs) are pointing up in several major developing countries. In particular, China’s manufacturing PMI edged up to 51.8 in August, the highest in 2 years, in line with an acceleration in industrial output growth to a 10.2 percent annualized pace in the three months ending August. Although output growth was weak in July for Brazil and Mexico, August PMIs were up for both – suggesting that the remainder of the third quarter should show improvement. Business sentiment is also improving in Turkey, and in South Africa where manufacturing PMIs rose to 50.9 and 56.5 respectively. In contrast, sentiment deteriorated in India and Indonesia, with sub-50 PMIs in both pointing to further weakness.|
|Oil prices have retreated after reaching a 7-month high in early September. Brent and WTI are down 7% and 4% respectively since peaking on September 6th, but remain 7% and 12% higher than in June. The surge reflected a spike in geopolitical tensions in the Middle East, and concerns over the potential for spillovers to oil supplies from the region. Supply disruptions in Libya (3 million mb/d), Iran (1 million mb/d each) and to a lesser extent Iraq and Nigeria also played a role. Markets remain well supplied, as lost production was offset by increased output from Saudi Arabia, the world's largest oil exporter. Despite raising its production to record levels, Saudi Arabia still has an estimated 2 mb/d of spare capacity, which combined with the easing of geopolitical tensions, are likely to put downward pressure on Brent. The price of West-Texas intermediate oil was largely untouched by these events, and the Brent-WTI spread, which exceeded US$ 20/bbl earlier in the year, has averaged less than US$ 4/bbl since July.|
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