(Bloomberg) -- Emerging-market equities are on fire, yet caution is creeping into other risk assets as rising U.S. Treasury yields keep investors on edge.
While the prospect of more U.S. stimulus drove MSCI Inc.’s gauge of developing-nation shares to a record on Friday, dollar bonds posted their first weekly decline since October as the yield on the benchmark 10-year Treasury note rose above 1%. Even the momentum that lifted emerging-market currencies to an all-time high faded toward the end of last week as the U.S. dollar strengthened.
How much higher U.S. yields go has become key to determining where risk assets are headed as the rollout of Covid-19 vaccines brightens the global growth outlook. Investors will keep a close eye on speeches by Federal Reserve officials, including Chair Jerome Powell, this week as well as U.S. inflation and retail sales data for any potential impact. The recent jump in oil prices is also a concern as traders ponder the possibility of accelerating inflation in the coming months and what that could mean for interest rates.
“For emerging markets, higher U.S. yields are a negative, so markets need to hear from the Fed that they will not tolerate an excessive rise,” said Henrik Gullberg, a macro-economist at Coex Partners Ltd. in London. “While higher crude is a positive, as it underpins the terms of trade of commodity producers, it underpins inflation and thus contribute to lower real rates.”
Fidelity International has reduced its overweight position in developing-nation debt even as it remains upbeat on the prospects for emerging markets, said Paul Greer, a money manager in London at the firm, which oversees about $611 billion. “We remain more positive on the emerging-market currency side, although we are watching the U.S. dollar and U.S. rates price action very closely here.”
“If the markets are beginning to price an unwind of quantitative easing or Fed policy tightening in the near to medium term, it will act as a major headwind for emerging-market risk assets,” Greer said. “However, if it is due to expectations of increased tax, spending and debt issuance in the U.S. it spells less imminent trouble.”
Meantime, a slew of December inflation data from developing economies, including China, India, Brazil and Russia will also garner scrutiny. Central banks in South Korea and Peru will probably keep interest rates on hold.
Korea, Peru Decide
- The Bank of Korea is expected to keep rates on hold on Friday, according to unanimous consensus of economists surveyed by Bloomberg
- “The bank will likely attempt to strike a more balanced tone by saying the continued recovery in exports and investment should support the recovery in 2021, but also stress the need for monetary policy to remain accommodative until the recovery broadens,” said Barclays Plc analysts led by Rahul Bajoria. “Comments around adding employment stability to the policy mandate, financial stability concerns, and the Korean won also will be watched by markets”
- The won was among the worst-performing currencies in Asia last week
- In Peru, the central bank is expected to hold its key rate steady while reiterating plans for a prolonged period of accommodative policies to support a comeback in economic growth, according to Bloomberg Economics
- The sol outperformed all of its Latin American currency peers in the first week of the new year
Key Data
- China’s CPI for December is due on Monday and is expected to come in flat
- China’s one-year medium-term lending rate for Jan. 15 will also be announced
- Trade numbers are due on Thursday, and are expected to show year-over-year export gains of about 15% and a surplus in excess of $70 billion for only the second time
- These bumper trade numbers are a key element of the yuan appreciation story, both from a flows perspective, and for diplomatic reasons
- China’s December currency settlement data are due later in the week. It will be interesting to see if the hitherto low exporter-conversion rates have started to increase
- The yuan was Asia’s strongest-performing currency last week after a rapid break of 6.50, though gains stalled after an initial burst amid speculation of a possible official resistance
- Malaysian November industrial production will be released on Monday
- Ringgit was the fourth-worst performing currency in emerging Asia on record Covid infections and political turmoil
- Malaysia’s vaccination plan is to be presented to the King on Monday, and should be approved by cabinet on Wednesday
- India’s inflation data for December are expected to show a large drop in the year-over-year rate in data due Tuesday, moving sharply back into the central bank’s target range. That may pave the way for a rate cut at its February review, according to Bloomberg Economics
- Industrial production report for November will be released on the same day, while wholesale prices and December trade figures are coming out later in the week
- South Korea’s unemployment is expected to remain constant in data due Wednesday
- There is perhaps a risk of a slight increase in unemployment given stress on the services sector from tighter social distancing rules
- This is of greater interest than usual, given that the BOK’s mandate may be extended to include employment
- Indonesia’s December trade numbers are due on Friday and are expected to show an increase in surplus
- READ: Five Positives to Power Indonesian Bonds in 2021: SEAsia Rates
- The crash of Sriwijaya Air Flight 182 on Saturday afternoon is another blight on Indonesia’s already poor aviation safety record
- Philippines remittance numbers are scheduled to be released on Friday after the nation’s central bank governor said he’s optimistic about overseas Filipino remittances
- In Russia, Tuesday’s second estimate of inflation for December will provide the details behind the year-on-year jump to 4.9% reported in the flash reading
- The ruble was one of the biggest gainers in emerging markets last week
- Investors will watch Brazil’s December inflation figures on Tuesday and November retail sales on Friday for clues on the path for monetary policy
- Further developments in the nation’s plans for vaccine roll outs will also be key, as well as news on the race for the lower house presidency and talks about a possible extension of stimulus measures
- Fiscal concern has weighed on the real this year, making it the second-worst performing currency in emerging markets
- A reading of Mexico’s November industrial production on Monday will probably show a decline from a year earlier, according to Bloomberg Economics. On Tuesday, investors will watch December formal job creation data for clues on how the ongoing pandemic is affecting activity
- Money managers may see another monthly rise in Argentina’s December inflation figures on Thursday, despite currency and price controls
- The nation is also expected to announce its December budget balance