Photographer: Nicole Tung / Bloomberg
Photographer: Nicole Tung / Bloomberg
Emerging market investors recovering from last month’s losses are headed for the first full week of April, preparing for further pain due to the higher yields of the US Treasury and a stronger dollar.
On Friday, Stronger-than-expected employment data in the US prompted traders to quote on a earlier start for Federal Reserve rate hikes. This is fueling concerns that the higher returns offered for risk-free investments in the world’s largest economy may take even more money out of emerging markets. Demand for assets from developing nations decreased at the end of March. Flows to equity funds fell to less than a third of the levels seen in February and bond funds ended the first quarter with more outflows, according to data compiled by EPFR Global.
Morgan Stanley is maintaining the downward trend in emerging market currencies, saying the The slow pace of vaccine release in many developing economies is threatening to ensure that growth in developing economies is lagging behind the United States. Meanwhile, Citigroup Inc. expects higher US yields and a resilient dollar to put more pressure on the asset class in the coming months.
“This quarter could be big for the dollar and not necessarily incredible for emerging markets,” said Luis Costa, head of strategy for CEEMEA at Citigroup in London. “We do not believe that the US curve has already adjusted. Between now and June / July, we can see a higher leg here in yields. “
Developing country currencies and bonds recorded their first quarterly decline in a year in the three months ended March 31, while the dollar approached its strongest level since November. The stock fell for the first time since September, reducing its earnings in the quarter.
Investors will turn their attention this week to inflation data in emerging markets, looking for clues about the path of monetary policy after Turkey, Russia and Brazil increased borrowing costs last month.
Price pressures
- Turkey can report on Monday that inflation rose to more than 16% in March, when the dismissal of Naci Agbal and the appointment of Sahap Kavcioglu as governor of the central bank caused the lira to plummet 10%
- The new central bank governor signaled last week that would not deviate from the hawkish policies of its predecessor
- Russia’s inflation probably accelerated to 5.8% in March, when the central bank raised interest rates in an effort to combat the effects of the ruble’s weakness and rising food prices.
- The ruble was the worst-performing emerging market currency last week amid concerns over U.S. sanctions
- Colombian inflation data, scheduled for Monday, may show a slowdown in March and lead traders to reduce the chances of a tightening cycle starting this year
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Although Chile’s March inflation figures on Thursday may signal an increase from the previous month, investors will be more focused on what a renewed block in the country’s capital means for a recovery
- The vaccine’s launch in Chile was the fastest in the region, but the bulls of the weight are keeping an eye on the short-term risk, since Covid’s cases reach record levels
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Mexico will release March CPI data and minutes from central bank meetings on Thursday, offering clues about the monetary authority’s plans
- Data-dependent policymakers kept the base rate at 4% in March due to an increase in consumer prices. February industrial production figures are expected to be released on Friday
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Thailand will publish March’s inflation figures on Monday, while the counterparts in the Philippines, Taiwan and China release similar data on Tuesday, Thursday and Friday, respectively
- China’s producer price index probably rose to the highest in more than two years last month, according to economists. Accelerating price growth is raising concerns that the country will export inflation globally due to its role as a manufacturer for the world
- The Philippine CPI is expected to remain above the central bank’s 2% to 4% target band for the third month due to rising food prices. Weight dropped 1% this year
Central banks on hold
- India’s central bank will keep interest rates at a record high when lawmakers meet on Wednesday, according to all economists interviewed by Bloomberg. There are many reasons for maintaining accommodation, given the concern about the resurgence of virus cases, although the prospect of accelerating inflation is limiting further easing.
- “We will seek any guidance on the possible normalization of liquidity conditions,” wrote Rini Sen, an economist at Australia & New Zealand Banking Group Ltd. in Bengaluru, in a research note. “At this juncture, the financial system is in a unique environment of excess liquidity, but increasing long-term yields on government bonds”
- Local Indian bonds have lost 1.3% this year in dollar terms, according to a Bloomberg Barclays index
- Investors will watch for Peru’s central bank decision on Thursday for signs of change by the monetary authority
- The cost of loans is stable at 0.25%, the lowest in Latin America since last April. Country should also disclose February trade balance
- Poland’s central bank is likely to keep interest rates unchanged
- Polish inflation unexpectedly rose in March to the highest level since September, increasing pressure on the country’s central bank to reconsider its dovish stance.
- The zloty strengthened against the euro last week, after touching a 12-year low on 29 March
What else to watch
- The spring meetings of the International Monetary Fund and the World Bank will take place for virtually the second year, starting on Monday
- The IMF will publish its updated World Economic Outlook on Tuesday, with Director-General Kristalina Georgieva already indicating a update to the January forecast of 5.5% global economic growth for 2021
- India’s Markit Manufacturing PMI, scheduled for Monday, is expected to show an expansion of industrial production for the eighth month in March
- South Korea’s current account balance expires on Wednesday. The won fell 4% this year despite the current account surplus
- China, Indonesia, Malaysia, Taiwan and the Philippines to release data on foreign exchange reserves on Wednesday
- The Philippines will publish February trade numbers on Thursday
- Taiwan’s trade statistics for March are due to be released on Friday. Strong export growth helped the local dollar to challenge US currency gains this year, weakening just 0.8%
- In Brazil, investors will weigh the risk of violating the spending limit as authorities discuss the budget. They will also see a reading of March’s IPCA inflation data on Friday, as the pandemic intensifies.
– With the help of Nicholas Reynolds and Philip Sanders