(Bloomberg) – Rising US government interest rates are beginning to concentrate minds in the world of emerging markets.
Bonds with local currency in developing countries had their worst week since September in the five days to Friday, while dollar debt fell the most since January, when rising inflation expectations gave rise to a routine in treasuries. The sell-off in the world’s largest bond market also sent implicit volatility for currencies and equities to the largest weekly increase this year.
All eyes will be on Federal Reserve President Jerome Powell’s testimony to Congress this week. The central bank governor is willing to reiterate remarks that decision-makers are fully committed to supporting the economy. Investors will also look for any sign that he is worried about steeper long-term borrowing costs after real long-term bond yields rose above zero for the first time since June.
“We still have to see the Fed expand its QE purchases sharply, as the market simply cannot absorb the US government issuance later in the year without much higher real returns, which would ultimately be toxic to asset markets,” John Hardy said. , head of currency strategy at Saxo Bank in Hellerup, Denmark, wrote in a report. “Rising interest rates do not even have to trigger a remarkable meltdown in risk sentiment, as long as the market is comfortable with fixed interest rates continuing to fall.”
Listen to EM Weekly Podcast: Powell to Tal Amid Climbing US Yields
A study by Bloomberg in January showed that all currencies in developing countries are typically sold when interest rates jump at a rate greater than approx. 25 basis points pr. Month. The 10-year Treasury return has increased by approx. 30 basis points this month at. 11:52 in London on Monday.
Oil will also keep traders on their toes, with Saudi Arabia and Russia again differing in terms of their output strategy on the way to an OPEC + meeting. The Mexican peso, the Colombian peso and the Russian ruble were among the worst performing in new markets when Brent crude oil withdrew on Friday.
“Our optimistic currency outlook in the new market is not without risk of setbacks along the way,” said Ehsan Khoman, Head of Research for New Markets in Europe, the Middle East and Africa at MUFG Bank in Dubai. “We believe that relative economic developments and attractive dividends will continue to favor stronger EM currencies when Covid-19 ebbs.”
South Korea and Hungary
Bank of Korea is expected to be pat with unanimous consensus on Thursday. The most interesting aspect of the meeting may be signals of government debt purchases. Legislators plan to draft a new supplementary budget in the coming weeks, where the potential for further debt issuance is likely to put upward pressure on interest rates. BOK prefers to use ad hoc debt purchases to address any volatility in the bond market instead of switching to a full-fledged quantitative easing program, according to Bloomberg Economics Korean 10-year bond yields rose 9 basis points last week, reflecting movements in US interest rates Hungary will likely keep the base rate at 0.6% on Tuesday, with the forint among the worst performers in new markets this month Hungary’s central bank had gained a reputation for being one of Europe’s most dovish before the coronavirus pandemic. Now it is among the most hawkish and follows caution to prevent financial market volatility and inflation
In Brazil, sw interest rates will see a reading of consumer price inflation in mid-February on Wednesday, which is likely to accelerate on an annual basis, underlining bets on an interest rate hike in March
Investors will also monitor the congressional debate around the 2021 budget and the prospect of a new round of cash disbursements. Data on current items on January Wednesday and unemployment and primary budget balance sheet figures on Friday could provide further evidence of the pandemic’s impact. President Jair Bolsonaro said several changes are underway following the appointment of a former general to replace the University of Chicago-trained economist running state-controlled Petroleo Brasileiro SA
Mexico’s mid-month inflation data scheduled for Wednesday will be examined after consumer prices peaked in January
Political decision-makers release minutes of their meeting in February on Thursday, which investors will monitor for clues on the central bank’s next move following a unanimous decision to cut interest rates by 25 basis points The Malaysian January CPI on Wednesday is expected to remain negative. remain in a strong surplus in data released Friday Ringgit was in stock last week – buffeted between opposing forces with strong dollars and robust oil prices as a net exporter of energy
South African budget
South African Finance Minister Tito Mboweni will present the budget for 2021-2022 on Wednesday Mboweni must convince investors that he has a credible plan to support an economy that has pulled in the most in nine decades last year, while also limiting growth in government debt The market also wants clarity about plans for debt-driven state-owned companies such as Eskom Holdings SOC Ltd. Nedbank Group Ltd. leads discussions to restructure the debt burden of the South African electricity supply, according to people familiar with the talks. Rand has had his worst weekly performance since early January in five days to Friday
Data and events
Sudan’s central bank said on Sunday it had implemented a comprehensive exchange rate system that is part of broader measures aimed at reviving its struggling economy
South Korea’s early exports rose at the fastest pace in more than two years in February
The nation’s export numbers often contain early traces of global production. For example, a Bloomberg study covering 2015-19 shows a 23% correlation between accidents versus consensus for these figures and accidents from the subsequently available US ISM data. The gains were flat last week despite the rise in the US dollars, perhs isolated by past poor performance relative to its behavioral drivers Thailand’s trading number is expected Tuesday. The balance should be just above zero, with a sharp drop in imports responsible for keeping the numbers in the black January balance of payments figures showing possibly a third straight deficit in data released Thursday Thai baht fell 0.4% last week, slightly more than the global average Taiwan’s export orders from January may show another significant increase on Wednesday with consensus around 46% year-over-year. Industrial production in January is likely to tell a similar story of recovery on Thursday – with consensus around 19% year-over-year. Another major current account number for the fourth quarter released on Friday Taiwan’s dollar was one of the biggest winners in Asia last year India’s fourth quarter GDP due to Friday is likely to show the first year-over-year expansion since the first three months of 2020 The Indian rupee was one of the strongest in Asia last week as the influx flowed into local stock markets China’s official PMIs for February – both for production and services expected on 28 February The Chinese yuan was the third weakest currency in Asia last week, although the stronger-than-expected appreciation in yuan terms on Friday yielded a glimmer of hope for bullsRead more: Yuan Fixing Miss May Herald Future Dollar DeclineA reading of Peru’s gross domestic product in the fourth quarter, scheduled for Monday, may show a recovery from d e low levels seen in the midst of the emergence of Covid-19 as it dwells below pre-pandemic levels, estimates Bloomberg Economics. Chile’s copper production in January Friday will look at how metal traders near the pinnacle of the decade, which promotes a rally in pesos A measure of Argentina’s economic activity index could mark a slowdown in December after seven straight monthly gains, according to Bloomberg Economics
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