It is a matter of pure assumptions, but next week may be the time when investors see the beginning of the end of the largism that has helped propel emerging markets to unprecedented highs.
Although few expect a sudden change in events, Russia’s decision on the interest rate and the release of Brazilian inflation data could help resolve an issue that is growing in the minds of investors. Namely, how will markets in the developing world behave when central bankers tighten their policy screws?
“Any sign of a change in stricter policies, for example in China, Brazil or Mexico, could lead to a broader correction of valuations in emerging market debt,” said Zsolt Papp, money manager at JPMorgan Asset Management. from London. “For the time being, most central banks in emerging markets are expected to maintain accommodative monetary policies.”
Dollar bonds in developing countries saw their biggest weekly advance this year in the last five days to Friday, after weaker-than-expected US data strengthened the $ 1.9 trillion aid package. to President Joe Biden. An index of stocks in emerging markets recorded its best week in November.
The gains were all the more impressive as they came as US Treasury yields rose to their highest levels in the early days of the pandemic, signaling growing concern that stimulus measures would act as a trigger for inflation. . A Bloomberg study in January found that developing currencies typically sell when yields rise and are particularly vulnerable when they are historically low.
For Lutz Roehmeyer, investment director at Capitulum Asset Management GmbH in Berlin, an increase in Treasury yields is a welcome indicator of the economic recovery, which is of more concern to 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.”
While Brazil’s inflation analysis and Russia’s rate decision will be closely monitored this week, there is little pressure for most countries to tighten policy now. Average inflation in developing economies was at a low level in the fourth quarter.
Emphasizing investor optimism, a measure of default volatility for currencies fell to its lowest level in July on Friday. An index of expected stock price fluctuations was at its lowest level in seven weeks.
Where Rates?
- The decision on the Bank of Russia’s policy rate is scheduled for Friday. Although the projected result is an expectation, inflationary pressures are on the rise and the focus will be on the guidelines in Governor Elvira Nabiullina’s statement or press conference suggesting a possible tightening.
- So far, there are few things on the derivatives market to suggest that it is imminent with forward rate agreements showing just any change expected in the next three months.
- Mexico’s policy makers are expected to cut key lending rates by a quarter of a point to 4% on Thursday, according to economists polled by Bloomberg
- A CPI reading from January on Tuesday and December industrial production early Thursday will be tracked for central bank indices
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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
- In the meantime, a reading of December retail sales data will reflect the latest emergency cash payments
- Economic activity for the same month probably increased from a month and a year earlier, say economists surveyed by Bloomberg
- Peru’s central bank is scheduled to keep its key interest rate at an all-time low of 0.25% on Thursday, the lowest in Latin America
- In Argentina, consumer price inflation probably rose to almost 4% in January, a figure that is unlikely to trigger any political reaction, according to Bloomberg Economics
- A reading of Chile’s consumer price inflation in January is likely to show an increase in energy prices.
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Bangko Sentral ng Pilipinas is expected by unanimous consensus to leave rates pending on Thursday
- Governor Benjamin Diokno said the monetary authority is due for “Long break” at least until the first half of 2021
- BSP warns that ratio of bank reserves could fall – although liquidity and abundance are still plentiful The rising CPI in January may also limit the scope for such a short-term move, according to Bloomberg Economics
- Read more: Philippines Diokno says the CPI is not temporary, we do not need to act
- Since the end of November, the peso has been spread around 48 per dollar. Increasing the central bank’s foreign exchange reserves – even taking into account the valuation and sovereignty effects bond issuance – suggests that the intervention is responsible for the extended stand
- China’s January price data is expected to return to deflation for the CPI year-on-year, while the PPI is expected to rise in positive territory in the report that will take place on Wednesday
- The decline in the CPI would reflect the slow pressure on domestic demand due to the recent tightening of virus isolation measures in some northern provinces. A high food price base could have led to a year-on-year decline in the food component
- On the other hand, a return to local commodity prices has probably given PPI a boost
- Aggregate financing and credit data for January are due during the week. The figures probably accelerated sharply in January-December – largely reflecting the seasonal
- The yuan was last week the second worst-performing currency in emerging Asia as a continuous exchange rate for the authorities the defiance continued
- India’s January CPI is likely to remain within the central bank’s target
- Indian Reserve Bank on Friday kept interest rates on hold at 4% for the fourth consecutive meeting, days after Prime Minister Narendra Modi’s government unveiled an expansive budget that could put inflationary pressures in the coming months
- The bonds fell like those of the RBI the promise of liquidity did not live up to expectations
- Volatile inflation data has caused headaches for the Hungarian central bank and the forint. Maybe less than this time – consumer prices probably rose 2.7% year-on-year in January, unchanged from December
- Political decision-makers have taken a more cautious approach and warned that rising consumer prices could temporarily rise above their target band.
- The forint has strengthened against the euro this year
- Ghana’s January inflation is likely to remain close to the top 10% of the central bank’s target range
Ramaphosa speaks
- President Cyril Ramaphosa will present the annual speech of the nation’s state of parliamentarians on Thursday
- Investors want to be assured that the government has an approach to the Covid-19 pandemic and the launch of vaccines and more clarity of plans to stimulate growth and reduce public debt
- They will also seek clarity on how the government intends to deal with troubled state-owned companies, including Eskom, the national electricity company and South African Airways.
- South Africa faces the highest debt risk of the countries that Bloomberg Economics has examined
- Its debt-to-GDP ratio will rise sharply, and its interest-to-GDP ratio will rise by more than 5% this year and exceed 11% in 2030
- This would be higher than in some recent cases of sovereign implications, such as Argentina (4% in 2001 and 2019) and Lebanon (about 10% in 2019).
- South Africa’s five-year credit swap premium has halved to about 200 basis points since the March rotation
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 shares and currency may be affected additional pressures from the nation the largest protests in more than a decade on Sunday. Tens of thousands of protesters took to the streets in several cities demanding the release of detained civilian leader Aung San Suu Kyi
Other Asian dates and events
- Malaysia’s December industrial production will be launched on Monday and is expected to contract year-on-year
- Fourth-quarter GDP is forecast on Thursday and is expected to decline at a faster rate year-on-year than the previous quarter
- Improving the performance of the goods sector traded in Malaysia is unlikely to be sufficient to offset weaker private consumption, according to Bloomberg Economics. High-frequency data up to 31 December suggest a significant slump in domestic economic activity in the fourth quarter of the third quarter
- Current account data for the fourth quarter are also due on the same day and should record another significant surplus.
- Ringgit was the weakest performer of emerging Asian currencies last week against Malaysia According to Goldman Sachs Group Inc., Covid cases growing and blocking relatively severe – the strictest in Asia.
- Taiwan’s January trade figures are expected to see export growth and a $ 5.1 billion gross surplus on Monday, according to economists surveyed by Bloomberg
- Taiwan dollar stays under appreciation pressure last week amid continued equity flows
- Central bank stated that it intends to tighten the rules on foreign exchange transactions of local companies in the latest movement to reduce speculation;
- South Korea’s unemployment figures for January are expected on Wednesday
- Bloomberg Economics forecasts a seasonally adjusted unemployment rate of 4.8% in January. The service sector has probably remained under pressure from virus restrictions
- Korean earnings weakened 0.5% last week after depreciating position adjustments and foreign stock sales in January
- India’s December industrial production will take place on Friday
- Bloomberg Economics expects a much better result than the consensus as a refund for fewer working days in November
- Poland, whose currency surpassed most of its colleagues this year, will release preliminary GDP data for the fourth quarter on Friday, which is likely to show a deeper contraction in the economy.
- December retail sales in Colombia, which will be launched on Friday, will be monitored by investors to find clues to a recovery in the South American country
– With the assistance of Tomoko Yamazaki and Aline Oyamada