The strong rebound that had swept through financial markets in Emerging Europe since March has seemingly run out of steam. Equity markets across the region have lost ground since the start of June, currencies have weakened and bond yields have crept up. There are a number of reasons why this may be a sign of things to come. First, in many cases, market gains since March went well beyond those justified by fundamentals. Second, with the pace of recovery in the global economy set to disappoint, and hence investor risk appetite likely to wane, markets could once again come under a bout of renewed pressure. Third, a series of local factors continue to loom large over financial markets in the region. Most notably, the spectre of devaluation in Latvia has increased in recent weeks. The fragile state of the region’s banking sector is also a concern. All of these factors suggest that further falls in financial markets are likely over the coming months.
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