This is a matter of pure conjecture, but next week may be the time for investors to see the beginning of an end to generosity that helped push emerging markets to unprecedented highs.
While few expect a sudden turn of events, Russia’s decision on interest rates and the release of data on Brazilian inflation could help resolve a growing issue in the minds of investors. That is, how will the markets of the developing world behave when central banks tighten the screws of politics?
“Any sign of a shift to stricter policies, for example in China, Brazil or Mexico, could lead to a broader correction in emerging market debt valuations,” 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.”
Dollar bonds from developing nations had their biggest weekly advance this year in the five days to Friday after weaker-than-expected U.S. employment data bolstered the case for the US relief package. $ 1.9 trillion from President Joe Biden. An emerging market equity index hit its best week since November.
The gains were even more impressive because they came as US Treasury yields peaked from the early days of the pandemic, which showed growing concern that stimulus measures would act as a trigger for inflation. A Bloomberg study in January found that currencies in developing countries tend to sell out when yields rise and are especially vulnerable when historically low.
For Lutz Roehmeyer, investment director of Capitulum Asset Management GmbH in Berlin, an increase in Treasury yields is a welcome indicator of economic recovery, which worries investors more.
“Rising U.S. yields are a good sign of the economic recovery from the Covid crisis,” he said. “The growth effect of 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 follow closely this week, pressure from most countries to tighten policy is now low. Average inflation in developing economies was at an all-time low in the fourth quarter.
Underlining investor optimism, a measure of implicit currency volatility fell to a low on Friday since July. An index of expected price changes in equities stood at a minimum of seven weeks.
Where are the rates?
- The decision on the type of policy of the Bank of Russia is scheduled for Friday. While the expected result is a suspension, inflationary pressure is rising and will focus on whether indications from Governor Elvira Nabiullina’s statement or press conference hint at the possibility of a future tightening.
- So far, there is little in the derivatives market to suggest that it is imminent with forward-type agreements that barely show any expected changes in the next three months.
- According to economists surveyed by Bloomberg, Mexico’s policymakers are expected to cut the key borrowing rate by a quarter to 4% to 4%.
- A January CPI reading on Tuesday and December of early Thursday industrial production will be monitored to find clues on the way to the central bank
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In Brazil, traders will watch inflation figures on Tuesday as they bet on the timing and pace of monetary normalization, according to Bloomberg Economics
- Meanwhile, reading the December-Wednesday retail sales data will reflect the latest emergency cash delivery
- Economic activity in the same month probably increased from a month as a year earlier, according to economists surveyed by Bloomberg
- Peru’s central bank will keep key interest rate at an all-time low of 0.25% on Thursday, the lowest in Latin America
- In Argentina, consumer price inflation probably stood at about 4% in January, a figure that is unlikely to trigger any political reaction, according to Bloomberg Economics
- A reading of Chilean consumer price inflation in January is likely to show a rebound, driven by energy prices
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Bangko Sentral de Pilipinas is expected, by unanimous consensus, to drop rates on Thursday
- Governor Benjamin Diokno has said that monetary authority is due to “Long pause” for at least the first half of 2021
- BSP has noted that it could reduce the reserve requirement ratio of banks, although it still has abundant liquidity and quantity. a high January CPI may also limit the scope of this move in the short term, according to Bloomberg Economics
- Read more: Philippines, Diokno says IPI is rising temporarily, no need to act
- The peso has been hovering around $ 48 since the end of November. The increase in foreign exchange reserves of the central bank – even taking into account the effects of valuation and sovereign bond issuance: suggests that the intervention is responsible for the prolonged stoppage
- China’s January price data is expected to return to CPI deflation year-on-year, while the PPI is expected to rise positive territory in the report to be presented on Wednesday
- The fall in the CPI would reflect slow pressure from domestic demand following the recent tightening of virus containment measures in some northern provinces. A high base of food prices may have led to a year-on-year decline in the food component
- On the other hand, the rise in local commodity prices probably gave a boost to the PPI
- Aggregate financing and January loan data is due during the week. The figures probably accelerated sharply in January from December, largely reflecting the season.
- The yuan was the second worst-performing currency in emerging Asia last week, according to the authorities’ ongoing exchange rate the challenge continued
- India’s January CPI likely remained within the central bank’s target range
- Friday Reserve Bank of India kept interest rates at 4% for the fourth straight meeting, days after Prime Minister Narendra Modi’s government unveiled an expansionary budget that could spark inflationary pressures in the coming months
- The bonds fell like those of RBI the promise of liquidity fell short of expectations
- Data on volatile inflation have caused headaches in the Hungarian central bank and the forint. Perhaps less this time around: consumer prices probably rose 2.7% year-on-year in January, unchanged from December
- Policymakers have taken a more cautious stance and warned that consumer price growth may temporarily rise above its target band.
- The forint has strengthened against the euro this year
- Ghana’s January inflation probably remained close to 10% above the central bank’s target range
Ramaphosa speaks
- President Cyril Ramaphosa will present his annual speech on the state of the nation to lawmakers on Thursday
- Investors want to make sure the government takes into account the implementation of the Covid-19 pandemic and 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 troubled state-owned companies, including Eskom, the national electricity company and South African Airways.
- South Africa faces the the highest debt risk in the countries Bloomberg Economics has examined
- Its debt-to-GDP ratio will rise sharply and the interest-to-GDP ratio is expected to rise above 5% this year and exceed 11% by 2030
- This would be higher than in some recent cases of sovereign 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 been 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-stakes presidential vote on Sunday
- Myanmar stocks and currency may be affected a new pressure after the nation the largest protests of more than a decade on Sunday. Tens of thousands of protesters took to the streets in several cities demanding 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 is expected to be contracted year-on-year
- Fourth-quarter GDP is forecast on Thursday and is expected to decline at a faster year-on-year rate than the previous quarter
- Improving the performance of the marketed goods sector in Malaysia is unlikely to be sufficient to offset weaker private consumption, according to Bloomberg Economics. High-frequency data up to December 31 suggest a significant slump in domestic economic activity in the fourth quarter compared to the third quarter
- Fourth quarter current account data is also due on the same day and should record another considerable surplus
- The ringgit was the worst performance of emerging Asian currencies last week with Malaysia According to Goldman Sachs Group Inc., there were increasing covid cases and a relatively severe closure: the strictest in Asia.
- According to economists surveyed by Bloomberg, Taiwan’s trade figures are expected to see a jump in exports and a $ 5 billion surplus on Monday.
- Taiwanese dollar remained under appreciation pressure last week amid continued equity inflows
- The central bank said it plans to tighten rules on foreign exchange transactions of local businesses in the latest move to curb speculation
- South Korea unemployment data for January is due to be released on Wednesday
- Bloomberg Economics forecasts the seasonally adjusted unemployment rate at 4.8% in January. The services sector probably continued to be pressured by virus restrictions
- Korean victory weakened 0.5% last week, after depreciating due to position adjustment and overseas equity sales in January
- India’s December industrial production is due to be released on Friday
- Bloomberg Economics expects a much better result than the consensus as amortization for fewer business days in November
- Poland, whose currency has outperformed most peers this year, will release preliminary fourth-quarter GDP data on Friday, which is likely to show a deeper contraction in the economy
- December’s Colombian retail investments, which will be released on Friday, will be monitored by investors to find clues about the South American nation’s recovery.
– With the assistance of Tomoko Yamazaki and Aline Oyamada