Emerging market investors reeling from last month’s losses are heading into the first full week of April bracing for further pain fueled by higher US Treasury yields.
On Friday, Stronger-than-expected US employment data led traders to trade at a earlier start of Federal Reserve rate hikes. That fuels concerns that the higher returns offered by risk-free investments in the world’s largest economy could draw even more money away from emerging markets. Demand for developing country assets declined at the end of March. Flows to equity funds fell to less than a third of the levels seen in February and bond funds closed the first quarter with more outflows, according to data compiled by EPFR Global.
Morgan Stanley remains bearish on emerging market currencies, saying that The slow pace of vaccine launches in many developing economies threatens to ensure that growth in developing economies will lag relative to the US Meanwhile, Citigroup Inc. expects higher US returns and a resilient dollar. to put more pressure on the asset class in the coming months.
“This quarter can be a big one for the dollar and not necessarily surprising for emerging markets,” said Luis Costa, head of strategy CEEMEA at Citigroup based in London. “We don’t think the US curve has finished tightening. Between now and June / July, we could see one more stretch here in yields. “
Developing nation currencies and bonds posted their first quarterly decline in a year in the three months ending March 31, while the dollar approached its strongest level since November. The shares fell for the first time since September, reducing its earnings for the quarter.
Investors will turn their attention this week to inflation data in emerging markets as they look for clues about the path of monetary policy after Turkey, Russia and Brazil increased borrowing costs last month.
- Turkey can report on Monday that inflation rose above 16% in March, when the firing of Naci Agbal and the appointment of Sahap Kavcioglu as governor of the central bank sent the lira down 10%.
- The new central bank governor pointed out last week that would not deviate from the aggressive policies of its predecessor
- Russia’s inflation likely accelerated to 5.8% in March, when the central bank raised interest rates in an effort to combat the effects of a weak ruble and rising food prices.
- The ruble was the worst-performing emerging market currency last week amid concerns over US sanctions.
- Colombian inflation data, scheduled for Monday, may show a slowdown in March and push traders to trim the odds of a tightening cycle starting this year.
While Chile’s March inflation figures on Thursday may indicate an increase from the previous month, investors will be more focused on what a new lockdown on the nation’s capital means for a recovery.
- The launch of the vaccine in Chile has been the fastest in the region, yet peso bulls are eyeing short-term risk as Covid cases hit record highs.
Mexico will release March CPI data and central bank meeting minutes on Thursday, offering clues about the monetary authority’s plans.
- Data-reliant policy makers held the key rate at 4% in March given a rebound in consumer prices. Industrial production figures for February will be released on Friday.
Thailand will release inflation figures for March on Monday, while its counterparts in the Philippines, Taiwan and China will report similar data on Tuesday, Thursday and Friday, respectively.
- China’s producer price index likely rose to the highest in more than two years last month, according to economists. Accelerating price growth raises concerns that the country will export inflation globally given its role as a manufacturer to the world.
- The Philippine CPI is expected to remain above the central bank’s 2% to 4% target band for the third month due to rising food prices. The peso has fallen 1% this year
Central banks on standby
- India’s central bank will keep interest rates at a record low when policymakers meet on Wednesday, according to all economists surveyed by Bloomberg. There are many reasons to stay accommodating given concerns about a resurgence in virus cases, although the prospect of accelerating inflation is limiting further relaxation.
- “We will seek any guidance on the possible normalization of liquidity conditions,” wrote Rini Sen, an economist at Australia & New Zealand Banking Group Ltd. in Bengaluru, in a research note. “At this juncture, the financial system is in a unique environment of excess liquidity but increasing long-term returns on government securities.”
- India’s local bonds have lost 1.3% this year in dollar terms, according to a Bloomberg Barclays index.
- Investors will be watching the Peruvian central bank’s decision on Thursday for signs of change from the monetary authority.
- Borrowing costs have remained stable at 0.25%, the lowest in Latin America, since last April. The nation is also scheduled to release February’s trade balance figures.
- Poland’s central bank will likely keep interest rates unchanged
- Polish inflation unexpectedly rose to the highest level since September in March, mounting pressure on the country’s central bank to reconsider its dovish stance.
- The zloty strengthened against the euro last week after hitting a 12-year low on March 29.
What else to look at
- Spring meetings of the International Monetary Fund and the World Bank will be held for virtually a second year starting Monday.
- The IMF will release its updated World Economic Outlook on Tuesday, and Managing Director Kristalina Georgieva will already indicate a update to January forecast of 5.5% global economic growth by 2021
- India’s Markit Manufacturing PMI to be released on Monday is forecast to show factory production expanding for an eighth month in March
- South Korea’s current account balance is due on Wednesday. The won has fallen 4% this year despite a current account surplus
- China, Indonesia, Malaysia, Taiwan and the Philippines will release all foreign exchange reserve data on Wednesday.
- Philippines to release February trade figures on Thursday
- Taiwan’s trade statistics for March are due to be released on Friday. Strong export growth has helped the local dollar challenge gains in the US currency this year, weakening just 0.8%.
- In Brazil, investors will weigh the risk of breaching spending limits as civil servants discuss the budget. They will also watch a reading of the March IPCA inflation data on Friday as the pandemic continues.
– With the help of Nicholas Reynolds and Philip Sanders