Markets hammered by flight to safety

Financial markets across the region have been hammered by a flight to safety over the past month as concerns about fiscal sustainability in the euro-zone have reached fever pitch. Equities, currencies and bonds have all sold off, with Brazilian markets hit particularly hard. The Bovespa index has tumbled by 10% since the start of the month and now stands close to our end-year target of 60,000 (which looked extremely bearish at the start of the year). The good news is that the latest sell-off has left equity valuations looking less stretched and currencies less overvalued. Nonetheless, there are plenty of reasons to be cautious. With the global recovery set to fade next year, risk appetite is likely to remain fragile and commodity prices should fall further. Financial markets look set for a rough ride over the coming months.