EM Bonds on Cusp of Rally Now at Mercy of Fed, Trade Talks

(Bloomberg) -- Emerging-market bonds are close to signaling a rally ahead of what’s shaping up to be a pivotal week, with traders standing by for the Federal Reserve’s first policy decision of 2019 and a crucial moment in the U.S.-China trade talks.

A JPMorgan Chase & Co. measure of emerging-market sovereign bond yields is a whisker away from falling below its 200-day moving average, an occurrence that’s heralded gains on all five of the previous occasions it’s broken through such a level since 2008. While the Fed is likely to keep interest rates unchanged on Wednesday following nine hikes since 2015, investors are betting on a dovish tilt from Chairman Jerome Powell.

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“The market will need confirmation of a dovish bias by the Fed to maintain the positive momentum; anything less could lead to a sharp correction,” said Anders Faergemann, a fund manager at PineBridge Investments in London, which has $90 billion in assets. “We dialed up risk earlier in the year to take advantage of higher carry in EM and are looking for a potential reversal in the dollar as the U.S. economy slows down and the Fed pause may turn into a hold.”

A Bloomberg foreign-exchange index that measures carry-trade returns from eight emerging markets, funded by short positions in the dollar, formed a bullish golden cross on Jan. 18 when its 50-day moving average climbed above its 200-day equivalent. The last time this pattern was formed was in March 2017, heralding a 10-month advance in developing-nation currencies.

Investors who have been adding to their emerging-market holdings are also hoping for more evidence of a trade truce when China’s Vice Premier Liu He begins two-day talks with U.S. Trade Representative Robert Lighthizer. But tension between Washington and Beijing is about to get more complicated as the World Trade Organization poised begins an investigation into President Donald Trump’s tariffs on $250 billion of Chinese goods.

Risk of ‘Twitter Barrage’

• The Geneva-based WTO launched an inquiry on Monday into whether the U.S. duties run afoul of a requirement that all its members give each other the same tariff treatment, as China asserts, according to an official with knowledge of the probe
• If a trade deal between the world’s two largest economies isn’t reached by March 1, the Trump administration has threatened to raise the tariff rate on $200 billion in Chinese goods to 25 percent from 10 percent
• “Setbacks in the negotiations run the risk of attracting the ire of President Trump, who may set off a Twitter barrage against China, which would likely have a negative impact on especially the FX markets,” said Per Hammarlund, the chief emerging-markets strategist at SEB SA in Stockholm
• Economists expect China’s Caixin manufacturing PMI due Thursday to drop a notch below the 50 level that indicates contraction

Turkey’s Inflation Report

• Turkey’s central bank publishes its quarterly inflation report on Wednesday. Investors will be scouring the release and the accompanying presentation by Governor Murat Cetinkaya for policy clues as consumer prices start to slow
• The lira was the biggest gainer, after the South African rand and Argentine peso, in emerging markets last week; Turkish Finance Minister Berat Albayrak predicted a “soft landing’’ for the economy after bouts of currency turbulence

India’s Pre-Election Budget

• India is scheduled to present its final budget on Friday before a high-stakes election due by May. Prime Minister Narendra Modi is under pressure to shore up popular support after his Bharatiya Janata Party lost control of key states in polls last month
• “Growth will outweigh fiscal discipline as the Modi administration pushes its way for a second term in the general election,” Prakash Sakpal, an economist at ING Groep NV in Singapore, wrote in a note
  • Persistently weak public finances will keep local government bonds and the Indian rupee under pressure, he said
• The rupee is the worst-performing emerging-market currency this year versus the dollar after the Romanian leu

Venezuela Bondholders Celebrate Protests

• Growing protests in Venezuela will keep pressure on the government of President Nicolas Maduro after National Assembly leader Juan Guaido claimed the presidency
• Venezuela abandoned its decision to sever diplomatic ties with the U.S., retreating from days of bellicose rhetoric prompted by the U.S. decision to recognize National Assembly leader Juan Guaido as the nation’s rightful head of state
• Republican Senator Lindsey Graham said President Trump spoke to him about the possibility of using military force in Venezuela as recently as a couple of weeks ago, Axios reports, citing a phone interview with Graham
• Venezuelan bonds maturing in 2027 rallied to their highest since President Nicolas Maduro’s debt restructuring speech in November 2017 amid optimism about a regime change.

Brazil Congress Takes on Pension Plan

• Investors are hoping that Brazil’s Congress, which reconvenes Friday, can finally pass a reform bill for the nation’s bloated pension system, in an effort to tackle the country’s budget deficit
• The legislation is being pushed by President Jair Bolsonaro, but may face pushback from legislators
• The real edged lower last week despite a charm offensive by Bolsonaro in Davos
• Iron ore giant Vale SA’s board is suspended dividend payments following the collapse of a tailings dam Friday in the state of Minas Gerais which killed at least 60 people, with 292 still missing, and destroyed buildings. Brazil’s second deadly dam accident in little more than three years comes at a time of environmental and mining-reform plans. Vale shares plunged as much as 20 percent

Economy Under AMLO

• Mexico’s fourth-quarter gross domestic product report is due on Wednesday, providing clues on the strength of the economy at a time when Andres Manuel Lopez Obrador is bedding down in the presidency
• Forecasts show growth slowing to 2 percent from 2.5 percent a year earlier
• Mexican stocks and the currency have rallied since Lopez Obrador took office in December
• Trump, in an interview Sunday with the Wall Street Journal, vowed to build a U.S.-Mexico border wall as he doubted congressional negotiators would reach an acceptable border-security deal

Ecuador Bond Sale, Chile Rate Hike

• Ecuador’s sovereign notes due in 2028 slid by 2 cents to 86.97 cents, the biggest drop since June, as government readied an unexpected bond sale; debt had been expected to come to market after talks with IMF, said AllianceBernstein’s Shamaila Khan
• Chile’s central bank will probably boost interest rates on Wednesday as the economy recovers. The peso marked its fourth week of gains
• Hungary’s central bank will probably maintain its hawkish stance at a rate meeting on Tuesday, without announcing the start of tightening just yet, as core price pressures continue to brew
  • Investors expect policy makers to announce the unwinding of unconventional stimulus in March, when the central bank will publish updated economic forecasts
• Kenya, Ghana, Colombia and Ukraine will likely hold rates steady

--With assistance from Alec D.B. McCabe and Tomoko Yamazaki.

To contact the reporters on this story: Netty Ismail in Dubai at nismail3@bloomberg.net;Lilian Karunungan in Singapore at lkarunungan@bloomberg.net;Justin Villamil in Mexico City at jvillamil18@bloomberg.net;Robert Brand in Cape Town at rbrand9@bloomberg.net

To contact the editors responsible for this story: Dana El Baltaji at delbaltaji@bloomberg.net, Justin Carrigan, Chris Vellacott

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