It’s a matter of sheer suspicion, but the next week may well be the time when investors see the beginning of an end to the generosity that has propelled emerging markets to unprecedented highs.
While few expect a sudden turnaround, Russia’s interest rate decision and the release of Brazilian inflation data could help resolve a question that comes to mind of investors. Namely, how will markets in the developing world behave when central bankers tighten policy screws?
“Any sign of a change in tighter policies, for example in China, Brazil or Mexico, could lead to a broader correction in emerging market debt valuations,” said Zsolt Papp, a money manager at JPMorgan Asset Management in London. “For now, most emerging market central banks are expected to pursue accommodative monetary policies.”
Developing country dollar bonds had their biggest weekly gains in the five days through Friday this year, after weaker-than-expected US job data backed up the arguments for President Joe Biden’s $ 1.9 trillion aid package. An index of emerging markets equities had had its best week since November.
The gains were all the more impressive because they came when US Treasury yields rose to their highest levels since the early days of the pandemic, a sign that concerns are mounting that the stimulus will act as an inflation trigger. A Bloomberg study conducted in January found that developing country currencies typically sell out when interest rates rise and are especially vulnerable when they are historically low.
For Lutz Roehmeyer, chief investment officer at Capitulum Asset Management GmbH in Berlin, a rise in government bond yields is a welcome indicator of recovery that is more worrying for investors.
“Rising US yields are a good sign of the economic recovery from the Covid crisis,” he said. “The growth effect for emerging markets should be much more positive than the cost of higher interest rates.”
Although inflation in Brazil and Russia’s interest rate decision are being closely monitored this week, there is little pressure for most countries to tighten policies now. Average inflation in the emerging economies reached a low point in the fourth quarter.
To underscore investor optimism, a measure of implied currency volatility dropped to its lowest level since July on Friday. An index of expected price movements in stocks was at its lowest point in seven weeks.
Where do rates go?
- The Bank of Russia’s policy interest rate decision is scheduled for Friday. While a wait is the predicted outcome, inflationary pressures are mounting and the focus will be on whether the guidelines in the statement or from Governor Elvira Nabiullina’s press conference point to the possibility of future tightening
- So far, there is little in the derivatives market to indicate that it is imminent, as interest rate futures show hardly any change over the next three months.
- Policymakers in Mexico are expected to cut key borrowing rates by a quarter point to 4% on Thursday, economists surveyed by Bloomberg said
- A reading of January’s CPI on Tuesday and December’s industrial production early Thursday will be watched for clues in the central bank’s path
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In Brazil, traders will watch inflation numbers on Tuesday while betting on the timing and pace of monetary normalization, according to Bloomberg Economics
- A reading of December’s retail sales on Wednesday will, in the meantime, reflect the latest emergency cash out
- Economic activity for the same month is likely to have increased from both a month and a year earlier, say economists surveyed by Bloomberg
- Peru’s central bank plans to keep its key interest rate at a historic low of 0.25% on Thursday, the lowest in Latin America
- In Argentina, consumer price inflation was likely to fluctuate near 4% in January, a figure that is unlikely to trigger a policy response, according to Bloomberg Economics.
- A reading of Chilean consumer price inflation for January is likely to show a rebound driven by energy prices
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Bangko Sentral ng Pilipinas is expected to leave tariffs on hold Thursday by unanimous consensus
- Governor Benjamin Diokno has said that the monetary authority one “Long break” until at least the first half of 2021
- BSP has indicated that it could lower banks’ reserve requirements – although liquidity is still plentiful and January’s soaring CPI may also limit opportunities for such a move in the near term, he said Bloomberg Economics
- Read more: Philippines Diokno says CPI Uptick Temporary, no need to act
- The peso has been around $ 48 per dollar since late November. The increase in the central bank’s foreign exchange reserves – even taking into account valuation effects and sovereignty bond issue – suggests that intervention is responsible for the long-term freeze
- China’s January price data is expected to fall back into deflation for CPI year-on-year, while PPI is expected to rise positive terrain in the report expected Wednesday
- The decline in the CPI would reflect the sluggish pressures of domestic demand due to the recent tightening of virus control measures in some northern provinces. A high basis for food prices may have led to a year-on-year decline in the food component
- On the other hand, a rebound in local commodity prices likely boosted the PPI
- Total financing and loan details for January are due during the week. The numbers are likely to have accelerated sharply from December in January – largely due to seasonality
- The yuan was the second worst-performing currency in emerging Asia last week, given the authorities’ persistent exchange rate resistance continued
- India’s CPI for January likely remained within the central bank’s target range
- 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
- Bonds fell like RBIs liquidity promise fell short of expectations
- Volatile inflation figures have given the Hungarian central bank and the forint a headache. Perhaps less this time – consumer prices are likely to have risen 2.7% a year in January, unchanged from December
- Policymakers have taken a more cautious stance, warning that consumer price growth could temporarily exceed their target bandwidth
- The forint has strengthened against the euro this year
- January inflation in Ghana likely remained close to the top 10% of the central bank’s target
Ramaphosa speaks
- President Cyril Ramaphosa will present his annual state-of-the-nation speech to lawmakers on Thursday
- Investors want reassurance that the government is in control of the Covid-19 pandemic and vaccine rollouts, and more clarity about plans to boost economic growth and reduce government debt.
- They will also be seeking clarity on how the government plans to deal with ailing state-owned companies, including Eskom, the national electric utility, and South African Airways.
- South Africa stands for the highest debt risk of the countries that Bloomberg Economics researched
- The debt ratio is set to rise sharply and the interest-to-GDP ratio is expected to rise above 5% this year and the highest 11% in 2030.
- That would be higher than in some recent cases of sovereign debt defaults, such as Argentina (4% in 2001 and 2019) and Lebanon (around 10% in 2019)
- South Africa’s five-year credit default swap premium has more than halved to around 200 basis points since the March route
Politics and protests
- Investors will be focused on Ecuador’s bond market after the first round of Sunday’s high-stakes presidential election
- Myanmar’s stocks and currencies may be covered further pressure after the nation the biggest protests in more than a decade on Sunday. Tens of thousands of protesters took to the streets in various cities, calling for the release of detained mayor Aung San Suu Kyi
Other Asian dates and events
- Malaysian industrial production in December is set to be released Monday and is expected to contract year-on-year
- GDP for the fourth quarter is expected on Thursday and is expected to contract year-on-year faster than the previous quarter
- The improvement in the performance of Malaysia’s traded goods sector is unlikely to be enough to offset weaker private consumption, said Bloomberg Economics. High-frequency data up to December 31 suggests a significant slippage in domestic economic activity in the fourth quarter from the third quarter
- The current account data for the fourth quarter also has to be paid on the same day and should again produce a significant surplus
- The ringgit performed worst last week with Malaysia among emerging Asian currencies Covid cases are on the rise and there is a relatively severe lockdown – the toughest in Asia, according to Goldman Sachs Group Inc.
- Taiwan’s January trade data is expected to show a surge in exports and a sizeable $ 5.1 billion surplus, according to a Bloomberg study.
- The Taiwan dollar remained under pressure last week due to continued equity inflows
- The central bank said it plans to tighten up the rules for currency transactions of local businesses in the last step to curb speculation
- South Korea’s unemployment data for January is expected on Wednesday
- Bloomberg Economics predicts the seasonally adjusted unemployment rate will be 4.8% in January. The services sector likely remained under pressure from virus restrictions
- Korean won 0.5% weakened last week, following position adjustment and foreign share sales in January
- India’s industrial production in December is scheduled for Friday
- Bloomberg Economics expects a much better than consensus result as a payback for fewer working days in November
- Poland, whose currency has outperformed most peers this year, will release preliminary GDP data for the fourth quarter on Friday, which is likely to show a deeper contraction in the economy
- Colombian retail sales for December, released Friday, will be monitored by investors for indications of a recovery in the South American nation
– With the assistance of Tomoko Yamazaki and Aline Oyamada