Soaring US Treasury yields are beginning to focus minds on the emerging market world.
Developing nations’ local currency bonds had their worst week since September in the five days through Friday, while dollar debt declined the most since January as rising inflation expectations drove a drop in Treasuries. . The sell-off in the world’s largest bond market also sent implied volatility in currencies and equities to the biggest weekly rise this year.
All eyes will be on Federal Reserve Chairman Jerome Powell’s testimony before Congress this week. The head of the central bank is ready to It echoes observations that policy makers are fully committed to supporting the economy. Investors will also look for any signs that you are concerned Higher long-term borrowing costs after real rates on long bonds rose above zero for the first time since June.
“We will still need to see the Fed greatly expanding its QE purchases, as the market simply cannot absorb the net issuance of US Treasuries later this year without much higher real returns, which would eventually be toxic to asset markets “, John Hardy. head of currency strategy at Saxo Bank in Hellerup, Denmark, wrote in a report. “Rising yields need not even necessarily trigger a noticeable collapse in risk sentiment, as long as the market is confident that real interest rates will continue to fall.”
Listen to EM: Powell’s weekly podcast to speak amid rising returns in the US.
A Bloomberg study in January found that all developing world currencies typically sell out when yields rise at a rate above about 25 basis points per month. The 10-year Treasury yield has risen 31 basis points this month since Monday’s first trading in London.
Oil will also keep traders on their toes, with Saudi Arabia and Russia deferring once again in their production strategy ahead of an OPEC + meeting. The Mexican peso, the Colombian peso and the Russian ruble were among the worst performers in emerging markets, as Brent crude fell on Friday.
“Our optimistic outlook for emerging market currencies is not without risk of setbacks along the way,” said Ehsan Khoman, director of research for emerging markets in Europe, Middle East and Africa at MUFG Bank in Dubai. “We believe that a relative cyclical outperformance and attractive returns in offer continue to favor stronger emerging currencies as Covid-19 ebbs “
South Korea and Hungary
- The Bank of Korea is expected to stand firm by unanimous consensus on Thursday
- The most interesting aspect of the meeting could be any signal about the purchase of public debt. Legislators are plans to draw up another supplemental budget in the coming weeks, with the possibility of additional debt issuance likely to put upward pressure on yields
- The BOK would prefer to use ad-hoc debt purchases to counter any bond market volatility rather than switch to a full quantitative easing program, according to Bloomberg economy
- Yields on Korean 10-year bonds rose nine basis points last week, reflecting movements in US yields.
- Hungary will likely maintain its base rate at 0.6% on Tuesday, with the forint among the worst performers in emerging markets this month.
- Hungary’s central bank had earned a reputation for being one of the most moderate in Europe before the coronavirus pandemic. Now, he is among the most aggressive and seeks caution to avoid volatility in financial markets and inflation.
In Brazil, swap rate traders will see a mid-February reading of consumer price inflation on Wednesday, which is likely to accelerate annually, underscoring bets on a rate hike in March.
- Investors will also oversee the congressional debate on the 2021 budget and the prospects for another round of cash brochures
- January current account data on Wednesday and unemployment figures and the primary budget balance on Friday could offer further signs of the impact of the pandemic
- President Jair Bolsonaro said More changes are underway after appointing a former general to replace the University of Chicago-educated economist who runs Petroleo Brasileiro SA
Mid-month inflation data for Mexico, scheduled for Wednesday, will be analyzed after January consumer prices. exceeded expectations
- Policymakers will release the minutes of their February meeting on Thursday, which investors will monitor for clues on the central bank’s next steps after a unanimous decision to reduce rates by 25 basis points
- Malaysia’s January CPI on Wednesday expected to remain negative
- January’s trade balance is likely to remain in strong surplus in data to be released on Friday
- Ringgit was immobile last week, struck between opposing forces of a strong dollar and oil prices as a net exporter of energy
South African budget
- South African Finance Minister Tito Mboweni to present 2021-2022 budget on Wednesday
- Mboweni must convince investors that he has a credible plan to support an economy that contracted the most in nine decades last year, while slowing the growth of public debt.
- The market also wants clarity on plans for indebted state-owned companies such as Eskom Holdings SOC Ltd. Nedbank Group Ltd. is leading discussions to restructure South African power utility’s debt burden, according to people familiar with the talks
- The rand had its worst weekly performance since early January in the five days through Friday.
Data and events
– With the assistance of Tomoko Yamazaki and Aline Oyamada