JPMorgan Warns of Capital Flight from Emerging Markets: A Looming Risk

Stocks

Economic

Summary:

Emerging markets are experiencing a significant outflow of capital, with $19 billion withdrawn in Q4 2024 and an additional $10 billion projected for Q1 2025...

A Surge in Capital Outflows from Emerging Markets

JPMorgan has raised concerns about the "sudden stop" in capital flows to emerging markets, excluding China, as global investors withdraw funds in response to robust U.S. economic growth and policy shifts. In Q4 2024, these economies witnessed a net outflow of $19 billion, with another $10 billion expected to leave in early 2025. The ongoing outflows highlight a significant challenge for developing economies, which rely heavily on foreign capital to sustain growth and financial stability.

The trend is not driven by specific crises in emerging markets but is instead a reflection of tightened global financial conditions. President Donald Trump’s "America First" policies, including aggressive tax reforms and economic incentives, have bolstered the U.S. economy, attracting capital at the expense of developing nations.

The Role of U.S. Policy in Shaping Capital Flows

President Trump’s policies, particularly tax cuts and domestic investment incentives, have made the U.S. an increasingly attractive destination for global investors. This environment has elevated expectations that U.S. interest rates will remain high for an extended period, further amplifying the pull of capital away from emerging markets.

Unlike past crises in emerging markets—such as the Asian financial crisis of 1998 or the taper tantrum of 2013—this phenomenon is not tied to localized economic vulnerabilities. Instead, JPMorgan attributes the outflows to strong U.S. growth and policy-induced risks, which are reshaping global investment patterns.

Resilience and Vulnerabilities in Emerging Markets

Despite the challenges posed by capital flight, most emerging economies remain resilient, with sufficient buffers to withstand the shock. However, JPMorgan has identified several countries that are particularly vulnerable to these outflows. Romania, Malaysia, South Africa, and Hungary are among the nations at greater risk, given their reliance on foreign investment to balance external accounts and maintain currency stability.

These economies may face increased borrowing costs, currency depreciation, and heightened fiscal pressures if the trend continues. Nonetheless, JPMorgan notes that the overall situation is not as dire as previous episodes of capital flight, given the relative stability in global markets and the absence of a systemic crisis.

The Outlook for Capital Flows

The trajectory of capital flows will largely depend on U.S. economic indicators and monetary policy decisions by the Federal Reserve. Key data on employment, inflation, and retail sales will play a critical role in shaping investor sentiment and influencing interest rate expectations.

Should U.S. economic data remain robust, the Fed is likely to maintain higher interest rates, further reinforcing the capital flight trend. Conversely, any signs of economic weakness in the U.S. could ease pressure on emerging markets, as global investors seek alternative opportunities.

Navigating a Shifting Landscape

The ongoing capital outflows from emerging markets underscore the broader impact of U.S. economic policies on global financial dynamics. While many developing economies possess the resilience to weather this shift, countries with higher vulnerabilities may face significant economic pressures.

JPMorgan’s warning serves as a reminder of the interconnected nature of global markets, where policy decisions in one region can ripple across others. For emerging markets, adapting to this changing landscape will require robust fiscal management, diversified funding sources, and strategic measures to maintain investor confidence amidst external uncertainties.

Source: JPMorgan

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Manuel

Economic

Political

New mixed messages this week about President Donald Trump's implementation of tariffs are flummoxing markets and businesses hoping for quick clarity on the 2.0 version of Trump's trade policy.

The main point of confusion is that public signals from Trump’s orbit often appear at odds with Trump himself.

The sometimes contradictory back and forth — a feature of the debate around tariffs since Trump's win — is taking on an outsized importance with the approach of Trump’s self-imposed Feb. 1 deadline, where he has promised to install 25% tariffs on Canada and Mexico and 10% duties on China.

Market observers are keenly trying to guess what will actually be installed, especially after an abbreviated weekend trade fight with Colombia that showed Trump willing to move quickly on tariffs but also willing to reverse course when the country backed down to his satisfaction.

This uncertainty will be on center stage Wednesday when commerce secretary nominee Howard Lutnick sits for his confirmation hearing.

Lutnick's comments on trade will be closely watched after Trump announced him as the leader of "our Tariff and Trade agenda."

Promises of tariffs that will be 'enough to protect our country'

The latest back and forth came in rapid succession on Monday following a Financial Times report that newly confirmed Treasury Secretary Scott Bessent is pushing a plan that would see Trump's plan for coming universal tariffs start at a lower level of 2.5% and then rise gradually.

Intentional or not, the report was taken as a clear and welcome signal to the markets, as gradual tariffs would allow businesses and supply chains to adjust even if the end result is the same.

But — as he has in the face of different apparent trial balloons in the past — Trump himself immediately poured cold water on the idea in favor of promising a maximalist approach.

Asked by reporters aboard Air Force One Monday night about the report, Trump denied it, said he wanted a rate "much bigger" than 2.5%, and even said he didn't think Bessent would be behind such an idea.

The coming rate, Trump added, "will be enough to protect our country."

The close focus on these signals from the new administration comes as business leaders try to plan and — in at least some cases — moderate Trump's plans.

"We've done a lot of scenario planning," said General Motors (GM) chair and CEO Mary Barra in a Yahoo Finance live interview Tuesday, adding that she has spoken to Trump on the issue and that she is confident the president "very much understands exactly what the ramifications will be."

Economists have been closely monitoring the situation, with a new Oxford Economics report this week considering the macroeconomic effect if Trump follows through on tariffs on our immediate neighbors.

"A trade war with Mexico and Canada is a key risk to the outlook," wrote Matthew Martin, a senior US economist. "We simulated a large tariff increase on Canada and Mexico and it would cause a big hit to the US economy," he added.

Other studies have found that the effects on Mexico and Canada could be deeper and an all-out trade war would likely be enough to push those countries into a recession.

A repeating pattern

This week's pattern was clearly reminiscent of an episode earlier this month after a Washington Post report floated the idea of Trump's aides (including Bessent) looking to place limits on his blanket tariff promises with some goods exempted.

Trump quickly stepped in — then as now — to deny that any limits were in the offing. The story "incorrectly states that my tariff policy will be pared back. That is wrong," he wrote at the time.

And earlier in the day Monday, Trump reiterated his tariff rhetoric in an appearance before House Republicans.

"We are going to immediately install massive tariffs," he told the crowd of countries that don't accede to his wishes, promising the duties would bring in trillions of dollars in revenue.

In the speech, Trump also made clear he plans to place duties on foreign goods like computer chips, semiconductors, pharmaceuticals, steel, and more in the "very near future" to return production of those goods to the US.

Meanwhile, close trade observers have been reading the signals in multiple ways as part of a lively ongoing debate around Trump.

"One theory," noted William Reinsch of the Center for Strategic and International Studies in a recent interview, is that the president's advisers think these trial balloons are "the best way to get his attention, rather than submitting a memo that he probably won't read."

He added some advice for the markets to "take a step back and wait for the dust to settle" but quickly noted that "nobody does that." - Ben Werschkul is Washington correspondent for Yahoo Finance.

Every Friday, Yahoo Finance's Rick Newman and Ben Werschkul bring you a unique look at how US policy and government affects your bottom line on Capitol Gains. Watch or listen to Capitol Gains on Apple Podcasts, Spotify, or wherever you find your favorite podcasts.

Source: Yahoo Finance

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Manuel

Cryptocurrency

Bitcoin (BTC) managed a minor bounce of its worst levels of the day, but the bitcoin mining stocks were unable to reverse any of their plunge as Chinese AI startup DeepSeek threw into question ideas that the miners had value as data center plays.

The largest cryptocurrency was recently trading at $101,500, up from earlier lows around $98,000 and still down 3% over the past 24 hours. The broader market gauge CoinDesk 20 Index fell 5.6%, dragged lower by double-digit losses of AI-adjacent tokens render (RNDR) and filecoin (FIL). Solana, which is a key hub for crypto AI agent tokens, also fell over 10%.

The sharp move down liquidated nearly $1 billion of leveraged derivatives positions across crypto assets, CoinGlass data shows. Bitcoin Mining Stocks With AI Ambition Battered 20%-30% Lower as Nvidia's Plunge Grips Crypto_1

Bitcoin Mining Stocks With AI Ambition Battered 20%-30% Lower as Nvidia's Plunge Grips Crypto_1

The Nasdaq closed the session 3% lower, with Nvidia leading losses with a 17% plunge, erasing $465 billion of its market value in a day. Today's move also reinforced bitcoin's tight correlation with tech stocks, Standard Chartered Bank's digital asset research head Goeffrey Kendrick noted.

The broad-market pullback didn't spare crypto-adjacent stocks, as crypto exchange Coinbase (COIN) and investment firm Galaxy (GXY) closed the day 6.7% and 15.8% lower. MicroStrategy, the largest corporate bitcoin holder, held up relatively well with a 1.5% decline.

Crypto mining stock rout

Bitcoin mining stocks suffered even steeper losses, with large-cap miners Riot Platforms (RIOT), MARA Holdings (MARA) plunging 8.7% and 16%, respectively.

Miners that pivoted to high-performance computing to provide infrastructure for artificial intelligence (AI) training fared even worse. Core Scientific (CORZ), TeraWulf (WULF), Bitdeer (BTDR) and Cipher Mining (CIPH), Applied Digital Corporation (APLD) all endured 25%-30% declines through the day."It seems that the crypto markets and AI supply chain-linked stocks — such as the Nuclear ETF, which had risen 20% over the past month leading up to today — reached a point where they needed an 'event' to trigger a profit-taking correction after pricing in a significant amount of 'good news,'" said Aurelie Barthere, principal research analyst at blockchain intelligence firm Nansen.

Market participants will focus on this week's Federal Reserve meeting and large tech firms' earnings reports. Corporate earnings have been strong so far, but the coming reports from Nvidia and other big tech firms "will need to beat expectations to sustain the momentum," Barthere said.

Monday's selloff could present a potential entry point for altcoin investors who missed the recent crypto rally after Donald Trump's election victory. Barthere noted that this might be especially true for higher-beta tokens like Solana (SOL), which have seen sharper declines compared to Bitcoin.

Source: Coindesk

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Adam

Economic

The Fed’s Balancing Act: Interest Rates and Economic Stability

The Federal Reserve’s first meeting of 2025 has become a focal point for economists, investors, and consumers alike. At the heart of the discussion is the question of how long the Fed will maintain its current interest rate policy. In 2024, the Federal Open Market Committee (FOMC) cut rates three times, reducing the federal funds rate by a total of 1 percentage point to a range of 4.25%–4.5%. However, these cuts have done little to alleviate the financial burden on consumers. According to Bankrate, most consumer borrowing costs remain at their highest levels in over a decade, and 30-year fixed mortgage rates have even risen despite the Fed’s efforts.

The Fed’s upcoming policy decision, scheduled for the afternoon of January 29, is widely expected to leave rates unchanged. Data from CME Group indicates a near-100% probability that the central bank will maintain its current stance. Experts suggest that a rate cut at the March meeting is also unlikely unless there are significant changes in inflation or economic growth. This cautious approach reflects the Fed’s commitment to balancing inflation control with economic stability.

Powell’s Press Conference: A Potential Market Mover

While the Fed’s decision on interest rates is critical, Chair Jerome Powell’s post-meeting press conference could be the real catalyst for market movements. Powell’s remarks have historically been a key driver of investor sentiment, but this time, analysts predict a more measured tone. Michael Feroli, Chief U.S. Economist at JPMorgan, notes that Powell’s press conferences typically dominate the spotlight, but the 2025 meeting may see a more cautious approach. Feroli suggests that Powell will likely avoid making bold statements, given the uncertain economic landscape and the potential for external factors to influence inflation and growth.

One such external factor is the potential impact of former President Donald Trump’s policies. Trump’s recent comments at the World Economic Forum in Davos, where he called for an “immediate rate cut,” have raised concerns about potential conflicts between his administration and the Fed. His proposed policies on tariffs, immigration, and domestic taxes could further complicate the Fed’s efforts to manage inflation and interest rates.

Key Economic Data to Watch

This week also marks the release of several critical economic reports that could shape the Fed’s future decisions. On January 30, the first estimate of fourth-quarter GDP is expected to show the U.S. economy growing at an annualized rate of 2.6% in the final three months of 2024. This robust growth underscores the resilience of the U.S. economy but also raises questions about whether inflationary pressures could reemerge.

On January 31, the Personal Consumption Expenditures (PCE) index, the Fed’s preferred measure of inflation, will be released. Economists forecast that core PCE, which excludes food and energy prices, will remain steady at 2.8% for December, unchanged from the previous month. This data will be crucial in determining whether the Fed’s current policy stance is sufficient to keep inflation in check.

Blake Gwinn, Head of U.S. Rates Strategy at RBC Capital Markets, warns that the combination of late-week data releases and Trump’s policy announcements could overshadow Powell’s press conference. Gwinn argues that Trump’s comments or the upcoming inflation data might “steal the show,” reducing the Fed’s influence on market dynamics in the short term.

The Broader Implications: Fed Policy in a Complex World

The Fed’s first meeting of 2025 highlights the challenges central banks face in navigating an increasingly complex global economy. While the Fed’s primary mandate is to maintain price stability and maximize employment, external factors such as political developments and global trade tensions can significantly impact its ability to achieve these goals. The interplay between Trump’s policies and the Fed’s decisions underscores the delicate balance between monetary policy and political influence.

As the meeting unfolds, all eyes will be on Powell and the Fed’s ability to communicate its strategy effectively. Will the central bank maintain its cautious approach, or will external pressures force a shift in policy? The answers to these questions will not only shape the trajectory of the U.S. economy but also set the tone for global financial markets in the years to come.

Overall, the Fed’s first meeting of 2025 represents a pivotal moment in the central bank’s ongoing efforts to steer the U.S. economy through uncertain times. With interest rates at elevated levels and inflation remaining a concern, the Fed’s decisions will have far-reaching implications for consumers, investors, and policymakers alike. As the world watches, the Fed must navigate a delicate balance between domestic economic priorities and the broader geopolitical landscape. The outcome of this meeting could well define the economic trajectory for the remainder of the decade.

Source: Yahoo Finance

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Adam

Political

Economic

The Stranded Vessel: A Consequence of Geopolitical Tensions

The Vladimir Latyshev, a 140-meter-long Russian cargo ship, has been stuck at the port of Saint-Malo in France for over two years. The vessel arrived in March 2022 to deliver magnesia but was subsequently barred from leaving the port due to sanctions imposed on Russia following the outbreak of the Ukraine conflict. Since then, the crew has been rotating shifts to maintain the ship and comply with port authority requirements. However, the ship’s ability to operate basic systems, such as heating, refrigeration, and fire prevention, is now under threat due to a critical shortage of diesel fuel.

The fuel crisis stems from frozen financial transactions between Russia and France, a direct result of the sanctions. Despite previous timely payments for fuel, the ship’s operators have been unable to transfer funds since 2024, leaving the vessel without the necessary resources to maintain its operations. This situation highlights the broader impact of geopolitical conflicts on global trade and maritime operations.

The Domino Effect of Sanctions on Maritime Operations

The sanctions have created a ripple effect, not only isolating Russian vessels but also complicating the logistics of maintaining them. The Vladimir Latyshev’s crew continues to receive food and essential supplies through advance payments, but the ship’s debt has ballooned to €150,000. Without diesel, the ship cannot generate electricity, rendering its critical systems inoperable. In an emergency, the crew may be forced to abandon the vessel, turning it into a "ghost ship" that could pose significant risks to maritime safety and the local environment in Brittany.

This predicament is not unique to the Vladimir Latyshev. According to local organization Mor Glaz, several other Russian ships are facing similar fates due to the sanctions. The organization has called on the French government to allow the release of frozen payments to prevent these ships from becoming abandoned hazards. The situation underscores the unintended consequences of sanctions, which, while aimed at pressuring a nation, can also lead to logistical and environmental challenges for other countries.

A Broader Look at the Impact of Sanctions

The case of the Vladimir Latyshev raises important questions about the long-term effects of sanctions on global trade and maritime safety. While sanctions are a powerful tool for exerting political pressure, they can also disrupt supply chains, strain port resources, and create environmental risks. The stranded ship serves as a microcosm of the broader challenges faced by the international community in balancing geopolitical strategies with practical concerns.

As the situation unfolds, the fate of the Vladimir Latyshev remains uncertain. Will the French government intervene to prevent the ship from being abandoned, or will it become a cautionary tale of the far-reaching consequences of geopolitical conflicts? The answer will likely have implications not only for this vessel but for the broader maritime industry as well.

Thus, the plight of the Vladimir Latyshev highlights the complex interplay between geopolitics and global trade. While sanctions are an essential tool for addressing international conflicts, their implementation must consider the potential for unintended consequences. As local organizations like Mor Glaz advocate for solutions, the international community must also reflect on how to mitigate the collateral damage of such measures. The story of this stranded ship is a reminder that even in times of conflict, cooperation and foresight are crucial to safeguarding shared resources and environments.

Source: Tagtik

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Jason

Three pillars of Trump’s “America first” foreign policy

There appear to be three main components of Mr. Trump’s foreign policy plans: a return to regional hegemony, global economic dominance, and tariffs designed to affect geopolitical outcomes. I’ll tackle these issues separately and discuss their various market implications.

Regional hegemony

Since the election on 5 November, Mr. Trump has commented repeatedly about the strategic importance of Greenland and the Panama Canal for the US, and he has taken a more adversarial tone with the leaders of Mexico and Canada than have his predecessors. His comments suggest that he may pursue a much more interventionist approach in the Americas, including potential military strikes against Mexican drug cartels, significant curbs on immigration at the US southern border, and attempts to influence Canada’s energy production and distribution.

At the same time, Mr. Trump has also distanced himself from NATO Article V obligations — under which NATO makes a pledge to assist fellow members in the event of an armed attack — unless governments (particularly in the EU) spend a larger percentage of their national budgets on defense. Mr. Trump views many of the foreign military campaigns undertaken by US presidents over the last few decades as unnecessary and expensive, particularly because (as he noted in a recent press conference) the US is separated from other great powers by two oceans. His rhetoric is likely meant to further pressure European countries to pay for their own defense against Russia. I’ll return to this point in a moment.

Global economic dominance

While President Trump may be focused on solidifying regional hegemony, in the economic sphere he still believes in global American dominance. Here, he is focused on a few key areas. First is the emergence of AI as a potential economic growth engine. The US has a first-mover advantage in AI, with the largest US companies investing significantly more in these technologies than their overseas competitors. Mr. Trump views AI as a strategic asset, and he will likely do what he can to protect America’s leadership in the space. Another area seen by the incoming administration as a competitive advantage is energy production. Both Mr. Trump and his nominee for Secretary of the Treasury, Scott Bessent, view US energy exports as key to maintaining global economic dominance. Finally, the President is adamant that the US dollar continue to be the global reserve currency, and he has threatened placing tariffs on the BRICS1 countries if they move toward settling trade outside the US dollar.

Tariffs and trade policy

The final piece of Mr. Trump’s foreign policy is likely to be the use of tariffs for strategic geopolitical gain. This would be a meaningful departure from his first term, when he viewed tariffs primarily as an economic tool to reduce the US trade deficit and improve trade agreements he viewed as unfair, including the North American Free Trade Agreement, or NAFTA. A recent social media post in which Mr. Trump suggested that Europe should buy more liquefied natural gas (LNG) from US producers indicates that he now views tariffs as a means of geopolitical leverage as much as a tool for economic rebalancing.

The ostensible objectives of the incoming Trump administration are all significant shifts from post-Cold War US foreign policy, which could be largely characterized as aiming to maintain global US hegemony while remaining open to economic liberalization, globalization, and free trade.

How the world (and markets) might react

US allies and adversaries alike are likely to respond very differently to an “America first” foreign policy than during Mr. Trump’s first term. First, Europe. Ironically, these policies might be exactly what Europe needs to heal its economic woes. Since Russia’s invasion of Ukraine in February 2022, European consumers have been hoarding excess savings in anticipation of higher commodity prices (Figure 1). While inflation has subsided, domestic consumer demand remains quite weak. If a Trump presidency leads to a swift resolution for the Russia/Ukraine war, then European energy prices could fall, boosting domestic industrial competitiveness and allowing excess savings to draw down.

At the same time, Mr. Trump’s insistence that Europe increase its defense spending and buy more US-produced LNG may also benefit EU countries over time. European leaders appear to recognize the need for stronger national security in a world where the US no longer seeks to be the global hegemon. Recently, the largest EU countries proposed joint defense bonds to finance more spending. Increasing LNG purchases from the US would also enable Europe to lessen its dependency on Russian natural gas. The point is that a win-win deal is possible, with Europe increasing defense spending and importing US-produced LNG in exchange for limited tariffs. What an “America First” Foreign Policy May Mean for Markets_1

What an “America First” Foreign Policy May Mean for Markets_1

In contrast to Europe, an “America first” foreign policy makes a trade deal with China much less likely. China, unlike Europe, has taken significant steps to dissociate itself from US markets since Mr. Trump’s first term. It has largely let its US Treasury portfolio run off, choosing to invest in gold, other commodities, and emerging markets instead. Additionally, Mr. Trump will likely continue to aim to stall China’s pursuit of regional control in East Asia without using direct military force. As a result, the Trump administration may be even more restrictive than the Biden administration in curbing AI chip exports.

China also needs to stimulate domestic consumption, which has been difficult given its leveraged corporate sector and weak housing market. China’s vast industrial base and national savings, however, could be redeployed to boost military spending. If China perceives the US as focused on regional balance of power, reticent to deploy troops abroad, and keen to use economic leverage against rivals, it may ramp up spending on strategic sectors, including defense, AI, and other cyber capabilities. As for market reactions to these scenarios, curbs on AI chip exports could dent the outlook for US tech companies, which could be a drag on the entire US equity market for some time. An increase in Chinese defense spending could create a tailwind for commodity markets, as inventories might be stretched due to increased demand. As of this writing, commodity markets have outperformed both US stocks and bonds year to date, potentially reflecting the increased geopolitical risk premium for these assets.

Typically, markets are quick to look past the impact from geopolitical shocks, recovering their upward climb after events like Brexit, Russia’s invasion of Ukraine, Hamas’s attack on Israel, and many others. Unlike those individual events, however, an “America first” foreign policy that prioritizes regional hegemony, global economic dominance, and tariffs designed to meet strategic geopolitical objectives presents a vastly different backdrop than markets have become accustomed to over the past few decades, with implications that investors cannot ignore.

Source: Wellington

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Warren Takunda

Economic

Donald Trump's Treasury Secretary Scott Bessent says the U.S. is ready to impose universal tariffs on U.S. imports, starting the rate at 2.5%.

The FT reports the plan is to ratchet up the import tax by 2.5% each month, giving businesses time to adjust and countries the chance to negotiate with the U.S. president’s administration.

The tariff could go as high as 20%.

Speaking to reporters on Monday, Trump confirmed his desire for universal tariffs, saying he wants them "much bigger than 2.5%".

The universal tariff is considered inflationary for the U.S. as it pushes up the cost of imported goods, raising the prospect of higher interest rates at the Federal Reserve for a longer period.

For this reason, analysts say it is a pro-USD policy. Following the news, the Euro to Dollar exchange rate (EURUSD) is half a per cent lower on the day at 1.0433, potentially bringing an end to a shallow rebound.

The Euro, Pound and other currencies had recovered against the U.S. Dollar amidst signs Trump had abandoned the universal tariff idea, something he threatened during his election campaign.

It is the fear of this blanket tariff that saw the Dollar surge following his win in November.

But Trump's first week in office saw him seemingly walk away from this stance, instead preferring to leverage tariffs on a case-by-case basis.

However, Bessent's comments suggest the administration still fully intends to pursue the universal tariff and potentially draw a line under recent USD weakness.

"The strong dollar narrative remains unchanged. We continue to look through all this tariff noise and believe that whatever final tariff plan eventually emerges, it will only magnify the current drivers of the ongoing dollar rally," says Dr. Win Thin, Global Head of Markets Strategy at Brown Brothers Harriman.

Trump has long believed in using tariffs to realign the global trade order in favour of America. He believes that the tax will help bring manufacturing back to the U.S. from global factories that have previously enjoyed cost advantages.

However, the obvious negative side effect for the President would be a rise in the cost Americans pay for those goods.

Trump believes he can mitigate some of the impacts by distributing the proceeds of the tariff take.

For global manufacturers, particularly those in the Eurozone, the tariff poses a significant headwind and currency analysts think this makes the Euro particularly vulnerable.

Source: Poundsterlinglive

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