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It’s a matter of pure conjecture, but next week may well be the time for investors to see the beginning of an end to the bounty that helped propel emerging markets to record highs.
Although few expect a sudden turn of events, Russia’s decision on interest rates and the release of Brazilian inflation data could help resolve an issue that is emerging on investors’ minds. That is, how will markets in the developing world behave when central bankers tighten the policy screws?
“Any sign of a shift towards stricter policies, for example in China, Brazil or Mexico, could lead to a broader correction of valuations on emerging market debt,” said Zsolt Papp, fund manager at JPMorgan Asset Management. in London. “For now, the expectation is that most emerging market central banks will maintain accommodative monetary policies.”
Developing-nation dollar bonds had their biggest weekly advance this year in the five days to Friday, after weaker-than-anticipated U.S. jobs data backed the case for President Joe’s aid package. $ 1.9 trillion Biden. An index of emerging markets stocks posted its best week since November.
The gains were all the more impressive because they came as US Treasury yields rose to their highest level since the early days of the pandemic, indicating growing concern that the stimulus measures will act as a trigger for the inflation. A Bloomberg study in January found that currencies in developing countries tend to sell when yields rise and are especially vulnerable when they are historically low.
For Lutz Roehmeyer, chief investment officer at Capitulum Asset Management GmbH in Berlin, a surge in Treasury yields is a welcome indicator of recovery, which is of more concern to investors.
“The increase in yields in the United States is 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.”
While Brazil’s inflation reading and Russia’s rate decision will be closely followed this week, there is little pressure for most countries to tighten policy now. Average inflation in developing economies remained at a record low in the fourth quarter.
Underscoring investor optimism, a measure of implied volatility in currencies fell to its lowest level since July on Friday. An index of expected price fluctuations in stocks was at a seven-week low.
Where Rates?
- The decision on the Bank of Russia’s monetary policy rate is scheduled for Friday. While the expected result is a suspension, inflationary pressure is building and the focus will be on whether the guidance in Governor Elvira Nabiullina’s statement or press conference hints at the possibility of future adjustment.
- So far, there is little in the derivatives market to suggest it is imminent, as future interest rate deals barely show any expected changes in the next three months.
- Policymakers in Mexico are expected to cut the key interest rate by a quarter of a point to 4% on Thursday, according to economists surveyed by Bloomberg.
- A January CPI reading will be watched on Tuesday and December industrial production early Thursday for clues about the central bank’s trajectory.
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In Brazil, traders will watch inflation figures on Tuesday while betting on the timing and pace of monetary normalization, according to Bloomberg economy
- A reading of December retail sales data on Wednesday, meanwhile, will reflect the latest emergency cash delivery.
- Economic activity for the same month likely increased from a month and a year earlier, say economists surveyed by Bloomberg.
- Peru’s central bank is expected to keep its key interest rate at a record low of 0.25% on Thursday, the lowest in Latin America.
- In Argentina, consumer price inflation was likely around 4% in January, a figure that is unlikely to provoke a political reaction, according to Bloomberg Economics.
- A reading of consumer price inflation in Chile for January is likely to show a rebound, driven by energy prices.
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Bangko Sentral ng Pilipinas is expected by unanimous consensus to put rates on hold on Thursday
- Governor Benjamin Diokno has said that the monetary authority must “Long break” for at least the first half of 2021
- BSP has indicated that it could reduce the reserve requirement ratio of banks, although liquidity is still abundant and The rise in the January CPI may also limit the scope of such a move in the short term, according to Bloomberg economy
- Read more: Philippines Diokno says CPI temporarily rose, no need to act
- The peso has been stuck around 48 to the dollar since late November. The increase in the central bank’s foreign exchange reserves, even taking into account valuation effects and bond issuance – suggests intervention is responsible for prolonged stagnation
- China’s January price data is expected to fall back into CPI deflation in year-on-year terms, while PPI is expected to rise to positive territory in the report due on Wednesday
- The fall in the CPI would reflect weak pressure from 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 decline in the food component
- On the other hand, a rebound in local commodity prices probably gave a boost to the PPI
- Aggregate financing and loan data for January should be presented during the week. Figures are likely to accelerate dramatically in January from December, largely reflecting seasonality
- The yuan was the second worst performing currency in emerging Asia last week, as the current exchange rate from the authorities. the challenge continued
- India’s January CPI likely stayed within the central bank’s target range
- The Reserve Bank of India on Friday kept interest rates at 4% for the fourth consecutive meeting, days after Prime Minister Narendra Modi’s government presented an expansive budget that could stoke inflationary pressures in the coming months
- Bonds fell like RBI liquidity promise did not meet expectations
- The volatile inflation data has caused headaches for the Hungarian central bank and the forint. Perhaps less this time: Consumer prices likely increased 2.7% annually in January, unchanged from December.
- Policy makers have taken a more cautious stance, warning that consumer price growth may temporarily rise above its target band.
- The forint has strengthened against the euro this year
- Ghana’s January inflation likely remained near the top 10% of the central bank’s target range.
This is Ramaphosa
- President Cyril Ramaphosa to deliver his annual state of the nation address to lawmakers on Thursday
- Investors want reassurance that the government controls the Covid-19 pandemic and the launch of the vaccine, and more clarity on plans to stimulate economic growth and curb public debt.
- They will also seek clarity on how the government plans to deal with struggling state-owned companies, including Eskom, the national power company and South African Airways.
- South Africa faces highest debt risk of the countries surveyed by Bloomberg Economics
- Its debt-to-GDP ratio is projected to rise dramatically and the interest-to-GDP ratio is expected to rise above 5% this year and exceed 11% in 2030.
- That would be higher than in some recent cases of sovereign defaults like 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 about 200 basis points since the March slide.
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’s shares and currency may fall higher pressure following the biggest protests in more than a decade on Sunday. Tens of thousands of protesters took to the streets of various cities calling for the release of the detained civil leader Aung San Suu Kyi
Other Asian data and events
- Malaysia’s industrial production for December will be released on Monday and is expected to have contracted year-on-year.
- Fourth quarter GDP is due on Thursday and is expected to decline at a faster year-on-year rate than in the previous quarter.
- Improving performance in Malaysia’s tradable goods sector is unlikely to be sufficient to offset weakness in private consumption, according to Bloomberg Economics. High-frequency data through December 31 suggest a significant slippage in national economic activity in the fourth quarter from the third quarter
- Current account data for the fourth quarter is also due on the same day and should post another sizeable surplus
- The ringgit was the worst performer among emerging Asian currencies last week compared to Malaysia. Covid cases on the rise and a relatively severe lockdown – the tightest in Asia, according to Goldman Sachs Group Inc.
- Taiwan’s January trade figures on Monday are expected to see a surge in exports and a huge surplus of $ 5.1 billion, according to economists surveyed by Bloomberg.
- The Taiwan dollar remained under appreciation pressure last week amid continued equity inflows.
- Central bank said it plans to tighten the rules on currency transactions by local businesses in the latest move to curb speculation
- South Korea’s unemployment data for January is due on Wednesday
- Bloomberg Economics forecasts the seasonally adjusted unemployment rate at 4.8% in January. The service sector likely remained under pressure from virus restrictions.
- The Korean won weakened 0.5% last week, after depreciating on the position adjustment and foreign share sales in January.
- India’s December Industrial Production Expires Friday
- Bloomberg Economics expects a much better result than consensus as payback for fewer business days in November
- Poland, whose currency has outperformed most of its peers this year, will release preliminary fourth-quarter GDP data on Friday, which will likely show a deeper contraction in the economy.
- Colombian retail sales for December, to be released on Friday, will be monitored by investors for clues about a recovery in the South American nation.
– With the assistance of Tomoko Yamazaki and Aline Oyamada
