It is a matter of pure conjecture, but the coming week may well be the moment when investors will see the beginning of the end for the generosity that helped propel emerging markets to unprecedented levels.
Although few expect a sudden change in events, Russia’s decision on interest rates and the release of Brazilian inflation data may help to resolve an issue that is growing in investors’ minds. That is, how will markets in the developing world behave when central banks tighten the bolts of policy?
“Any sign of a shift to stricter policies, for example in China, Brazil or Mexico, could lead to a broader correction of emerging market debt assessments,” said Zsolt Papp, money manager at JPMorgan Asset Management in London. “For now, the expectation is that most emerging market central banks will maintain accommodative monetary policies.”
Developing country dollar bonds saw their biggest weekly advance this year in the five days through Friday, after weaker-than-expected US employment data reinforced the case for President Joe Biden’s $ 1 aid package. , 9 trillion. An emerging market stock index registered its best week since November.
The gains were even more impressive because they came at a time when US Treasury yields reached their highest level since the early days of the pandemic, signaling a growing concern that stimulus measures will act as a trigger for inflation. A Bloomberg study conducted in January found that developing country currencies are usually sold when yields increase and are especially vulnerable when they are historically low.
For Lutz Roehmeyer, chief investment officer at Capitulum Asset Management GmbH in Berlin, an increase in Treasury yields is a welcome indicator of economic recovery, which worries investors more.
“The rise in US earnings is a good sign of the economic recovery from the Covid crisis,” he said. “The effect of growth for emerging markets should be much more positive than the cost of higher interest rates.”
While Brazil’s inflation reading and Russia’s interest rate decision will be closely monitored this week, there is little pressure for most countries to tighten policy now. Average inflation in developing economies reached its lowest level ever in the fourth quarter.
Reinforcing investor optimism, a measure of implied volatility for currencies fell on Friday to the lowest level since July. An index of expected stock price swings was at a seven-week low.
Fees for where?
- The Bank of Russia’s interest rate decision is scheduled for Friday. While the wait is the expected result, the pressure of inflation is growing and the focus will be on whether the guidance in the statement or the press conference by Governor Elvira Nabiullina gives hints on the possibility of future tightening
- So far, there is little in the derivatives market to suggest that it is imminent with forward rate deals showing almost no change expected in the next three months.
- Mexican lawmakers are expected to cut the basic interest rate by a quarter of a point to 4% on Thursday, according to economists polled by Bloomberg
- A reading of the January CPI on Tuesday and the December industrial production on Thursday morning will be observed for clues to the central bank’s trajectory
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In Brazil, traders will follow inflation figures on Tuesday, while betting on the timing and pace of monetary normalization, according to Bloomberg Economy
- A reading of December’s retail sales data on Wednesday, however, will reflect the latest emergency cash distribution
- Economic activity in the same month probably increased from the month and a year earlier, say economists polled by Bloomberg
- Peru’s central bank is expected to keep its base interest rate at a low of 0.25% on Thursday, the lowest in Latin America
- In Argentina, consumer price inflation probably fluctuated close to 4% in January, a figure that is unlikely to trigger any political reaction, according to Bloomberg Economics
- Chilean consumer price inflation reading in January will likely show high, driven by energy prices
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Bangko Sentral ng Pilipinas, by unanimous consensus, is expected to leave rates suspended on Thursday
- Governor Benjamin Diokno said that the monetary authority should make a “Long break” at least until the first half of 2021
- BSP signaled that it could reduce the bank’s reserve requirement ratio – although liquidity and The January CPI increase may also limit the scope for such a move in the short term, according to Bloomberg Economy
- Read More: Philippines Diokno says temporary CPI increase, no action needed
- Peso has been mired at around 48 per dollar since the end of November. The increase in the central bank’s foreign exchange reserves – even taking into account the effects of valuation and government issue of bonds – suggests that the intervention is responsible for the prolonged stoppage
- China’s January price data is expected to fall back to CPI deflation in annual terms, while the PPI is expected to rise to positive territory in the report for Wednesday
- The drop in the CPI would reflect the slow pressure on domestic demand following the recent tightening of virus containment measures in some northern provinces. A high base for food prices may have led to a year-on-year drop in the food component
- On the other hand, the resumption of local commodity prices probably boosted the PPI
- The aggregate financing and loan data for January expire during the week. The numbers must have accelerated sharply in January from December – largely reflecting the seasonality
- The yuan was the second worst performing currency in emerging Asia last week, according to the authorities’ continued exchange rate challenge continued
- India’s January CPI probably remained within the central bank’s target
- The Reserve Bank of India on Friday kept interest rates at 4% for a fourth consecutive meeting, days after Prime Minister Narendra Modi’s government revealed an expansionary budget that could fuel inflationary pressures in the coming months
- Titles fell like RBI’s liquidity promise fell short of expectations
- The volatile inflation data caused headaches for the Hungarian central bank and the forint. Maybe less this time – consumer prices probably rose 2.7% a year in January, unchanged from December
- Lawmakers took a more cautious stance and warned that consumer price growth could temporarily jump above its target band
- The forint has strengthened against the euro this year
- January inflation in Ghana probably remained close to the top 10% of the central bank target
Ramaphosa Speaks
- President Cyril Ramaphosa will give his annual state of the nation address to lawmakers on Thursday
- Investors want assurances that the government has control over the Covid-19 pandemic and the launch of the vaccine, and more clarity about plans to stimulate economic growth and reduce public debt.
- They will also seek to clarify how the government plans to deal with struggling state-owned companies, including Eskom, the national electricity company, and South African Airways
- South Africa faces the highest debt risk of countries that Bloomberg Economics has examined
- The debt-to-GDP ratio is expected to increase sharply and the interest-to-GDP ratio is expected to increase above 5% this year and reach 11% in 2030
- That would be greater than in some recent cases of sovereign defaults, such as Argentina (4% in 2001 and 2019) and Lebanon (about 10% in 2019)
- South Africa’s five-year credit swap premium has more than halved to about 200 basis points since the March defeat
Politics and Protests
- Investors will be focused on Ecuador’s bond market after the first round of a high-risk presidential vote on Sunday
- Myanmar shares and currency may fall more pressure after the nation biggest protests in more than a decade on Sunday. Tens of thousands of protesters took to the streets in several cities calling for the release of detained civil leader Aung San Suu Kyi
Other Asian data and events
- Malaysia’s December industrial production will be released on Monday and may have contracted from the previous year
- Fourth quarter GDP matures on Thursday and is expected to shrink at a faster rate year on year than in the previous quarter
- The improvement in the performance of the goods marketed in Malaysia should not be enough to compensate for weaker private consumption, according to Bloomberg Economics. High-frequency data through December 31 suggests a significant slump in domestic economic activity in the fourth quarter from the third quarter
- The current account data for the fourth quarter also expire on the same day and should record another considerable surplus
- Ringgit had the worst performance among emerging Asian currencies last week with that of Malaysia Covid cases on the rise and a relatively severe block – the most stringent in Asia, according to Goldman Sachs Group Inc.
- Taiwan’s January trade numbers on Monday are expected to see a jump in exports and a large $ 5.1 billion surplus, according to economists polled by Bloomberg
- The Taiwanese dollar remained under appreciation pressure last week amid continued stock inflows
- The central bank said it plans to tighten the rules on foreign exchange transactions by local companies in the latest move to curb speculation
- South Korea’s unemployment data for January should be published on Wednesday
- Bloomberg Economics projects a seasonally adjusted unemployment rate of 4.8% in January. The service sector must remain under pressure from virus restrictions
- The Korean won weakened 0.5% last week, after depreciation in position adjustment and foreign stock sales in January
- India’s industrial production in December expires on Friday
- Bloomberg Economics expects a much better result than the consensus as a return for fewer business days in November
- Poland, whose currency outperformed most pairs this year, will publish preliminary fourth quarter GDP data on Friday, which is likely to show a deeper contraction in the economy
- Colombian retail sales in December, to be released this Friday, will be followed by investors looking for clues about the recovery of the South American country
– With the help of Tomoko Yamazaki and Aline Oyamada