Emerging markets bear the brunt

Emerging markets felt the pain of investors trying to shed risk in the face of rising US Treasury yields and a lacklustre policy response from Japan.

Mexico's CDS spreads widened 196bps to 147bps on Tuesday, and have now doubled since May 9, when the fears of the Federal Reserve tapering QE purchases became more acute. Brazil's spreads have also lost ground in recent weeks, and the current 185bps five-year level is the widest since November 2011.

They were far from alone in seeing credit deterioration. All 14 constituents of the Markit CDX.EM index widened significantly as investors shied away from high yielding assets that have benefitted from QE, such as emerging market credit. It may be that we are seeing what happens when an overbought risk asset market adjusts to life without central bank largesse.

The Bank of Japan is at a different stage than the Fed, but it didn't provide the market with any assistance today. It left the current monetary policy stimulus on hold, and more importantly, refrained from commenting on volatility in Japanese government bonds. This was disappointing as the oscillations in JGB yields have affected sentiment across global markets.

In Europe, high-beta names, both sovereign and corporate, were among the main casualties of investor uncertainty on monetary policy. Portugal was 25bps wider at 371bps, and Spain and Italy both lost ground. Spanish and Italian banks were among the worst performers in the Markit iTraxx Europe index, and miners Glencore and Anglo American also lagged behind.

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