Dovish Fed Drives Emerging Markets to January Rally: EM Review

(Bloomberg) -- Emerging markets started the new year on a high note as riskier assets were buoyed by a more dovish Federal Reserve and the resumption of U.S.-China trade talks. Stocks soared in January by the most since March 2016, and currencies posted the biggest gain in a year.

The following is a roundup of emerging-markets news and highlights for the week ending Feb. 3.

Asset Moves WeeklyJanuary
MSCI EM stocks index+1.7%+8.7%
MSCI EM FX index+0.8%+2.6%
Bloomberg Barclays Global EM Local Currency bond index +0.8%+2.6%

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Highlights:

  • The Federal Reserve said it will be “patient” on any future interest-rate moves and signaled flexibility in reducing its bond holdings
  • Despite a partial U.S. government shutdown, employers kicked off 2019 by hiring the most workers in almost a year
  • President Donald Trump is optimistic about the prospect of a trade deal with China after the “good vibe” of negotiations, a top White House adviser said
    • China promised to “substantially” expand purchases of U.S. goods, and both sides planned further discussions to reach a breakthrough
  • Trump told reporters on Friday there’s a “good chance” he’ll declare a national emergency on the U.S. southern border, but told them to wait until his State of the Union address on Feb. 5
  • A survey of purchasing managers at Chinese factories had the worst result since 2016 in January
  • South Africa’s trade surplus was the biggest on record in rand terms in December as imports shrunk 26 percent from the previous month
  • Two of Latin America’s biggest commodity producers moved closer to junk ratings after a tumultuous few weeks including a dam burst at one and a pipeline explosion at the other
    • Brazil’s iron ore giant Vale SA and Mexico’s state-controlled oil producer Pemex were downgraded by Fitch Ratings

Asia:

  • China’s holdings of U.S. Treasuries fell to the lowest level in a year-and-a-half
    • The nation’s provinces are downgrading their targets for economic growth in 2019 as exports and consumption slow
  • South Korea’s National Intelligence Service forecast that officials from the U.S. and North Korea will hold talks over a joint statement regarding the upcoming second summit between Trump and Kim Jong Un, Yonhap News reported
    • Exports fell in January, declining for a second straight month
    • U.S. insisted South Korea pay as much as 50 percent more for military protection
    • Average daily foreign-exchange transaction volume expanded to $55.51 billion in 2018, the biggest figure since the Bank of Korea reformed its statistics system in 2008
  • North Korea has promised to destroy all of its facilities for enriching uranium and plutonium, not just its Yongbyon site as previously announced, the top U.S. negotiator with Pyongyang said
  • India’s rupee was among the underperformers for the week; India’s government will breach its budget deficit target for a second year as Prime Minister Narendra Modi tries to woo voters before an election. The fiscal deficit in the year ending March 31 is forecast at 3.4 percent of gross domestic product versus a previous target of 3.3 percent
    • Main opposition Congress party promised to implement a minimum income guarantee program for the poor if it wins the upcoming general election, its leader Rahul Gandhi said on Twitter
  • The rupiah was among the top performers in the region for the week, and Bank Indonesia Executive Director for Monetary Management Nanang Hendarsah said the central bank will allow the currency to strengthen further as it’s “still undervalued”
    • Indonesia will seek to sustain the growth in domestic consumption and boost government spending in a bid to shield itself from a spillover of slowing economic growth in China, according to Finance Minister Sri Mulyani Indrawati
    • Foreign-direct investment in the final quarter of 2018 fell to 99 trillion rupiah ($7.1 billion)
  • Thailand’s baht was the best performer in Asia in January after its current-account surplus came in at $5 billion the month before, more than the analyst estimate of $3.5 billion and the $1.6 billion excess in November. Surplus totaled $37.7 billion in 2018
    • Consumer prices climbed 0.27 percent in January compared with a year earlier, the slowest pace in 18 months
    • The number of tourists coming to Thailand will hit a record 41.1 million in 2019, the government said
    • The performance of the baht is one factor that the monetary policy committee will evaluate when it meets in February to decide on the benchmark interest rate, Senior Director Don Nakornthab said
    • A recently created Thai political party seen as supportive of the military government picked junta leader Prayuth Chan-Ocha as one of three prime ministerial candidates ahead of a general election in March
  • Malaysia will terminate a $20 billion rail project with contractor China Communications Construction Co., Economic Affairs Minister Mohamed Azmin Ali said
  • The Philippines’ stock index completed a fifth straight week of advance amid fund inflows; the nation’s fiscal deficit probably widened to 3.1 percent of gross domestic product in 2018, breaching the cap as the nation invested heavily in infrastructure, Budget Secretary Benjamin Diokno said
  • Taiwan’s Democratic Progressive Party’s Ho Chih-wei was elected to the Legislature in a by-election in Taipei, according to the Central Election Commission
    • Economy expanded 1.8 percent in the fourth quarter from the year earlier, slowing from 2.3 percent in the previous three months

EMEA:

  • The U.S. Treasury Department lifted sanctions on three firms tied to Russian tycoon Oleg Deripaska, including United Co. Rusal, a move that will provide relief to the global aluminum market
  • Turkey’s Monetary Policy Committee barely tinkered with its projections for inflation and signaled it remains reluctant to cut borrowing costs. Investors cheered the comments, sending the lira to one of the best performances in emerging markets on Wednesday
    • Turkey rejected speculation that the nation’s policy makers are seeking support from the International Monetary Fund
  • Ghana’s central bank unexpectedly cut its benchmark interest rate to 16 percent, a six year-low and said it may be time to consider a lower inflation target
  • The Egyptian pound advanced as fund flows into the local Treasury bills market accelerated amid improving risk appetite across emerging markets
    • In debt auctions held during the week, foreign investors bought 30 percent of Egyptian local-currency Treasury bills and more than half of longer-dated bonds, the Ministry of Finance said
  • The Central Bank of Kenya left the key interest rate unchanged at 9 percent, as did monetary authorities in Lesotho and Hungary
  • The Saudi anti-corruption commission headed by Crown Prince Mohammed Bin Salman has concluded its mission and recovered about 400 billion riyals ($107 billion) including cash, real estate, companies and securities

Latin America:

  • The Mexican peso posted its first weekly slide since late November, dragged down by Pemex’s rating downgrade
    • Indebted state-owned oil producer was reduced to the lowest investment-grade level a day after the government proposed cutting $3.5 billion from its taxes, failing to include a widely anticipated capital injection
    • President Andres Manuel Lopez Obrador brushed off the downgrade, saying that Pemex is “recovering”
    • Mexico’s economic growth slowed in the fourth quarter amid a contraction in industrial activity
  • Brazil’s real climbed in January and stocks had their best month in a year amid positive expectations for the pension reform bill and the privatizations agenda as the country’s congress returned from recess on Friday
    • Salim Mattar, an official at the Economy Ministry in charge of privatizations, said Brazil is seeking to sell at least $20 billion worth of state-controlled companies this year
    • Vale SA recovered some of its losses after the world’s largest producer said it will halt some of its output following a deadly dam burst in Brazil
    • Senators chose a pro-government lawmaker as their chief, potentially boosting President Jair Bolsonaro’s reform agenda while leaving the administration’s strength in the upper house in question
  • Venezuela’s opposition supporters gathered Thursday in a second nationwide protest called by National Assembly President Juan Guaido in a defiant demonstration against President Nicolas Maduro
    • Trading in bonds issued by state oil giant PDVSA ground to a halt after the Trump administration included the securities in sweeping sanctions against Maduro’s regime
    • Maduro said “we’re getting ready to defend our country” as the U.S. presses him to cede power
  • Chile’s central bank raised its benchmark interest rate by a quarter point to 3 percent as policy markers look past below-target inflation to expectations for strong growth and investment
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