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It’s a matter of pure guesswork, but the coming week may well be the time when investors see the beginning of an end to the largesse that has helped propel emerging markets to all-time highs.
While few expect a sudden turn of events, Russia’s interest rate decision and the release of Brazilian inflation data could help sort out an issue that is popping up in people’s minds. investors. Namely, how will developing country markets fare when central bankers tighten the political screws?
“Any sign of a shift to stricter policies, for example in China, Brazil or Mexico, could lead to a wider correction in emerging market debt valuations,” said Zsolt Papp, fund manager at JPMorgan Asset Management in London. “For now, most emerging market central banks are expected to maintain accommodative monetary policies.”
Developing country dollar bonds saw their strongest weekly advance this year in the five days to Friday, after weaker-than-expected U.S. employment data strengthened the case for the President Joe Biden’s $ 1.9 trillion relief program. An emerging market equity index had its best week since November.
The gains were all the more impressive as they came as yields on U.S. Treasuries hit their highest level since the early days of the pandemic, signaling growing concerns that stimulus will act. as an inflation trigger. A Bloomberg study in January found that developing country currencies typically sell off when yields rise and are particularly vulnerable when they are historically low.
For Lutz Roehmeyer, chief investment officer at Capitulum Asset Management GmbH in Berlin, an increase in yields on Treasuries is a welcome indicator of recovery, which is of greater concern to investors.
“The rise in US rates is a good sign of the economic recovery after the Covid crisis,” he said. “The growth effect for emerging markets should be much more positive than the cost of higher interest rates.”
While the inflation reading in Brazil and Russia’s rate decision will be closely watched this week, most countries are in no rush to tighten their policies now. Average inflation in developing economies reached an all-time low in the fourth quarter.
Underlining investor optimism, a measure of implied currency volatility fell to the lowest since July on Friday. An index of expected stock price movements was at a seven-week low.
Where are the prices going?
- The Bank of Russia’s decision on the key rate is scheduled for Friday. Although a suspension is the expected result, inflationary pressure is increasing and the focus will be on whether the indications in Governor Elvira Nabiullina’s statement or press conference hint at the possibility of a future. tightening.
- Little in the derivatives market so far suggests it is imminent, with forward rate deals showing virtually no expected change over the next three months.
- Mexican policymakers are expected to cut the key borrowing rate by a quarter point to 4% on Thursday, according to economists polled by Bloomberg.
- A January CPI reading on Tuesday and December industrial production early Thursday will be watched for clues on the way to the central bank
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In Brazil, traders will monitor inflation figures on Tuesday by betting on the timing and pace of monetary normalization, according to Bloomberg Economy
- A December retail sales data reading on Wednesday, meanwhile, will reflect the latest in emergency cash distributions
- Economic activity for the same month is likely to have increased from a month and a year earlier, according to economists polled by Bloomberg.
- Peruvian central bank set to keep policy rate at historic low of 0.25% on Thursday, Latin America’s lowest
- In Argentina, consumer price inflation likely hovered around 4% in January, a figure that should not trigger a policy reaction, according to Bloomberg Economics
- A reading of Chilean consumer price inflation for January will likely show a rise, led by energy prices
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Pilipinas’ Bangko Sentral is expected by unanimous consensus to leave rates hanging on Thursday
- Governor Benjamin Diokno said the monetary authority should “Long break” at least until the first half of 2021
- BSP has signaled that it could reduce banks’ reserve requirement ratio – although cash and cash flow January’s surge in the CPI could also limit the scope of such a short-term development, according to Bloomberg Economy
- Read more: Philippines Diokno Says CPI Rise Temporary, No Need To Act
- The peso has stuck around 48 per 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 dropout
- China’s January price data is expected to fall back into deflation for the CPI in year-over-year terms, while the PPI is expected to rise in positive territory in the report expected on Wednesday
- The drop in the CPI is said to reflect weak pressure from domestic demand following the recent tightening of containment measures for the virus in some northern provinces. A high food price base may have led to a year-over-year decline in the food component
- On the flip side, a rebound in local commodity prices likely gave the PPI a boost.
- January aggregate finance and lending data is expected later this week. The numbers likely accelerated sharply in January compared to December – largely reflecting seasonality
- The yuan was the second worst performing currency in emerging Asia last week, the authorities’ current exchange rate challenge continued
- India’s January CPI likely stayed within the central bank’s target range
- Friday, the Reserve Bank of India held interest rates at 4% for a fourth consecutive meeting, days after Prime Minister Narendra Modi’s government unveiled an expansionary budget that could stoke inflationary pressures in the coming months
- Bonds fell like RBI the promise of liquidity did not meet expectations
- The volatility of inflation data has caused headaches for the Hungarian central bank and the forint. Maybe less this time – consumer prices likely rose 2.7% p.a. in January, unchanged from December
- Policymakers have taken a more cautious stance and have warned that consumer price growth may temporarily exceed the target range
- The forint strengthened against the euro this year
- Inflation in Ghana in January likely remained near the top of 10% of the central bank’s target range
Ramaphosa speaks
- President Cyril Ramaphosa to deliver annual State of the Nation address to lawmakers on Thursday
- Investors want confidence the government is on top of the Covid-19 pandemic and vaccine deployment, and more clarity on plans to spur economic growth and reduce public debt
- They will also seek clarification on 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 among countries surveyed by Bloomberg Economics
- Its debt-to-GDP ratio is expected to increase sharply and the interest-to-GDP ratio is expected to exceed 5% this year and reach 11% in 2030
- This 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 around 200 basis points since the March rout
Politics and protests
- Investors will focused on the Ecuadorian bond market after the first round of a high-stakes presidential poll on Sunday
- Myanmar stocks and currency could fall additional pressure following biggest protests in more than a decade on Sunday. Tens of thousands of protesters took to the streets of several cities to demand the release of detained civilian leader Aung San Suu Kyi
Other Asian data and events
- Malaysian industrial production for December will be released on Monday and is expected to have contracted year over year
- Fourth quarter GDP is expected Thursday and is expected to decline at a faster rate year over year than the previous quarter
- Improving the performance of Malaysia’s traded goods sector is unlikely to be enough to offset declining private consumption, according to Bloomberg Economics. High-frequency data through December 31 suggests a significant slide in domestic economic activity in the fourth quarter compared to the third quarter
- Fourth quarter current account data is also due the same day and is expected to record another sizable surplus
- The ringgit was the worst performing among emerging Asian currencies last week along with Malaysia Rising Covid cases and a relatively severe lockdown in place – the toughest in Asia, according to Goldman Sachs Group Inc.
- According to economists polled by Bloomberg, January trade figures in Taiwan are expected to show an increase in exports on Monday and a surplus of $ 5.1 billion.
- The Taiwan Dollar remained under appreciating pressure last week amid continued equity inflows
- Central bank said he plans to tighten the rules on local businesses’ foreign exchange transactions as part of the latest move to curb speculation
- South Korea unemployment data for January due on Wednesday
- Bloomberg Economics forecasts a seasonally adjusted unemployment rate of 4.8% in January. The service industry likely remained under pressure from virus restrictions
- The Korean won weakened 0.5% last week, after depreciating following position adjustment and overseas equity sales in January
- Indian industrial production for December is expected on Friday
- Bloomberg Economics expects much better than consensus result as reimbursement of fewer business days in November
- Poland, whose currency has outperformed the majority of its peers this year, will release preliminary fourth-quarter GDP data on Friday, likely showing a deeper contraction in the economy
- Colombian retail sales for December, to be released on Friday, will be watched by investors for clues of a recovery in the South American nation
– With the help of Tomoko Yamazaki and Aline Oyamada
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