Selloff Puts Emerging Markets on Trial While Bulls Hang Tough

After a one-month trial of 2021, the shoppers of emerging-market assets can point to any number of reasons for wanting their money back.

Yet the balance of evidence suggests they’ll stick with the product for a while.

For all the factors that triggered last week’s selloff, the prospect of stronger growth ahead as stimulus kicks in, vaccines are distributed and restrictions lifted continues to underpin confidence. Goldman Sachs Group Inc., Societe Generale SA and Loomis Sayles & Co. were among those talking up emerging markets in the past week, even as the Cboe Volatility Index had its biggest daily jump in about three years on Wednesday.

“I see the current backup as an opportunity to fade weakness, rather than the start of another sustained leg down,” said Ilya Gofshteyn, a senior emerging-markets strategist at Standard Chartered in New York. “Assets can rally once U.S. equity market volatility rolls over. Emerging-market currencies were on the back foot even ahead of the recent spike in VIX, so positioning is much cleaner now.”

Selloff Puts Emerging Markets on Trial While Bulls Hang Tough

MSCI Inc.’s gauge of developing-nation shares had the worst week since March in the five days through Friday, falling 4.5%, as the uneven rollout of inoculation programs and gyrations brought about by retail traders in U.S. markets sapped risk appetite.

Investor anxiety, as measured by expected price swings for equities, reached the highest in almost three months last week even as Federal Reserve Chairman Jerome Powell pledged to keep monetary spigots wide open. Implied volatilities across emerging-market currency pairs jumped on Friday, while local bonds fell for a third straight week.

Even so, exchange-traded fund investors poured money into emerging markets last week, undeterred by volatility.

February may still get off to a rocky start. Kicking off a week of economic releases, an official gauge of China’s manufacturing output slipped for a second month in January, while activity in the services sector slowed to the lowest reading since March, data published on the weekend showed. Traders are also monitoring silver’s price spike, as the precious metal took center stage Monday in the retail investor frenzy sweeping through markets.

Listen: EM Weekly Podcast: Risk of Retail Frenzy Contagion; PMI Numbers

Defaults and Restructurings

  • Zambia skipped a $56.1 million coupon payment on Jan. 30 on its Eurobond maturing in 2027, the Finance Ministry confirmed Sunday

    • It became Africa’s first pandemic-era sovereign to default after it missed a $42.5 million Eurobond coupon payment in November
  • Ethiopia’s State Minister of Finance Eyob Tekalign said the nation will seek to restructure its external debt under a Group-of-20 program
    • Its Eurobonds plunged the most on record on Friday
    • Chad was the first country to request the restructuring of its external debt under the G-20 common framework
  • Elsewhere, Argentina’s Salta province reached a deal with an ad-hoc creditors group for amendments to its foreign bonds due in 2024

Central Banks Decide

  • The Bank of Thailand is expected to keep interest rates on hold on Wednesday by unanimous consensus
    • Bloomberg Economics believes that this does not preclude other easing measures to build on relief for retail borrowers
    • The central bank may also express further concern about the Thai baht’s strength and discuss steps to “address structural problems in the foreign-exchange market and encourage more balanced capital flows,” as described in the most recent minutes
    • Read: Shorter Thai Bonds in Demand Ahead of Rate Verdict: SEAsia Rates
  • The Reserve Bank of India’s decision will be closely watched on Friday. Consensus expects policy makers to stand pat
    • However, Bloomberg Economics says the central bank has scope to ease rates after December inflation dropped to within its target band
    • If they do cut, analysts will watch how much shorter-tenor yields can fall even with the expected rate cut as the RBI has signaled its willingness to withdraw liquidity
  • Poland’s central bank is expected to hold rates Wednesday, according to all economists surveyed by Bloomberg
    • The zloty is little changed this year
    • The regulator pledged to return to currency interventions to avoid zloty gains and allow the economy take full advantage of ultra-lax monetary conditions
  • Central banks in the Czech Republic, Ghana and Egypt are also expected to keep rates on hold this week

Central Banks Intervene

  • A number of Asia’s large holders of reserves are due to report January foreign-exchange levels this week
  • January shouldn’t have been a heavy dollar-buying month given the recovery in the U.S. currency. For those countries that experienced depreciation pressure -- like South Korea -- the figures will provide an illustration of the asymmetric nature of reserves accumulation; Asian countries are generally more willing to buy dollars than to sell them
  • South Korea reports on Wednesday. Valuation effects alone could reduce the figure to $441.6 billion
    • The calculations of valuation-adjusted reserves accumulation are done on the assumption that 40% of currency reserves are denominated in non-dollar currencies -- broadly along the lines of the International Monetary Fund survey data
    • The Korean won was the worst-performing Asian currency in January
  • Indonesia, Thailand, Taiwan and the Philippines release data on Friday. Valuation alone would cut Taiwan’s figure to $528.1 billion
  • China releases its numbers on Feb. 7
    • The yuan was the strongest currency in Asia last week, as the authorities continued to battle the attraction of rising interest rates and corporate demand for the Chinese currency
    • Read: Yuan Bulls Take Comfort From High FX Conversion Rate: Macro View

PMI Pulse

  • A slew of factory activity data from Indonesia to India, Russia and Brazil will offer further clues on the pace of recovery across the developing world as investors assess whether market valuations are stretched
  • China’s official PMIs -- especially services -- were poor in data released on Sunday
    • The Caixin manufacturing numbers also disappointed in data released on Monday, falling 1.1 points below consensus
  • China aside, Asia’s January Markit manufacturing PMIs have so far come in strong. The average outcome -- excluding China -- rose for the ninth consecutive month, by 0.7
    • Back of the envelope calculations suggest that PMIs should have been expected to come in roughly flat. On the one hand, the tightening of lockdown conditions across the region and spill-over from China’s official PMI slowdown were expected to constrain these figures. On the other, strong U.S. Markit figures for January, and impressive export data from South Korea suggested support for the numbers
  • China (Caixin) and India’s (Markit) service PMIs are due Wednesday. China’s number is expected to lose a little momentum

Inflation Watch

  • January CPI data will be closely watched. Any sign of slowing inflation would boost real yields in a low interest-rate environment -- a relief to bond investors
  • Indonesia’s number on Monday unexpectedly fell on a headline basis, and remains comfortably below the central bank’s target range
  • South Korea’s figure is due on Tuesday. Philippines, Thailand, and Taiwan report on Friday -- consensus expects most to remain stable
  • A reading of Colombia’s January consumer price inflation, scheduled for Friday, may show a small increase while lingering below the target
  • Argentina’s central bank is expected to release its monthly survey on inflation expectations on Friday
  • Peruvian headline inflation for January is expected to rise from a month earlier while staying near the midpoint of target, according to Bloomberg Economics

Other Data & Events

  • Myanmar’s military detained Aung San Suu Kyi, declared a state of emergency and seized power for a year after disputing her party’s landslide November election victory in a setback for the country’s nascent transition to democracy. The nation’s stock exchange on Monday said it halted trading due to a connection error

    • Still, it’s unlikely that there will be a spill-over into other Asian markets
  • India’s bonds tumbled and stocks surged after the government unveiled a spending plan worth almost a half-trillion dollars to help lift Asia’s third-largest economy out of a pandemic-induced slump
  • South Korean export data, released on Monday, beat expectations by a little more than 1 percentage point, while the nation’s current-account balance is due Friday
  • Indonesia’s fourth-quarter GDP report is due on Friday, and is expected to show a continued contraction
  • A nationwide truckers strike in Brazil never materialized on Monday
  • Brazilian lawmakers return from recess on Monday and vote on new presidents for the lower house and Senate. The two candidates backed by President Jair Bolsonaro are broadly favored to win and the result of the election could impact the outlook for economic reform in Latin America’s largest economy, including further fiscal stimulus to ward off the worst of the pandemic’s economic effects
  • On Tuesday, Brazilian December industrial production figures are expected to show a continued rebound from the pandemic plunge.
  • Chile’s economic activity fell less than expected in December from a year earlier as the government imposed tougher restrictions against the coronavirus

    • Business confidence rose, perhaps signaling that vaccine rollouts in the nation will be enough to stoke a comeback
  • Meeting minutes from Colombia’s January meeting may offer investors a more dovish tone and hint at further accommodation if inflation remains subdued, according to Bloomberg Economics

    • Policy makers held their key rate at an all-time low for a fourth straight month last week

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