- The average sovereign spread of the 15 largest frontier economies has soared to a distressed level of 1000 basis points over U.S. Treasuries, notes Gavekal analyst Victor Tsui in a note to clients. A strong dollar makes it harder for indebted countries to finance their liabilities since their own currencies are worth less—and that in turn can hit confidence in their ability to repay their debt thereby adding even more pressure on their currency—what Tsui describes as a “self-reinforcing downward spiral.” While these countries aren’t heavily represented in equity investors’ portfolios, Tsui notes they make up almost a fifth of the JP Morgan EMBI global diversified index, creating “a sizable risk of contagion” to the broader emerging market debt ecosystem if stresses rise further. READ MORE
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