Emerging Markets Caught in Flux as Central Banks Walk Tightrope
A young man balances on a tightrope at Ipanema beach in Rio de Janeiro, Brazil. (Photographer: Dado Galdieri/Bloomberg)

Emerging Markets Caught in Flux as Central Banks Walk Tightrope

Emerging markets may be about to enter a fresh period of volatility as central banks struggle to hold inflation in check while keeping the growth fires burning.

Though the Federal Reserve last week indicated it’s in no hurry to raise interest rates -- triggering further gains in the dollar and U.S. Treasury yields at the expense of risk assets -- hikes in borrowing costs in Russia, Turkey and Brazil underscored the dilemma. Policy makers in Thailand, South Africa and Mexico are among those meeting to decide rates this week.

“The tug of war between accommodative policies and robust growth is unlikely to derail the recovery, but it could result in heightened volatility nonetheless,” Christian Keller and Michael Gapen at Barclays Capital wrote in a report published Saturday. “Emerging market challenges from higher U.S. yields and a rising dollar were illuminated” by the central bank decisions, they said.

Emerging-market currencies still made gains last week, ending the longest weekly losing streak since August 2019. The lira, rand and real strengthened the most in the five days ending March 19. Local-currency and dollar-denominated bonds also snapped several weeks of declines, though MSCI Inc.’s gauge of emerging-market equities fell for the first time since Feb. 26. Still, investors added money to the largest exchange-traded funds dedicated to emerging markets last week, extending a 20-week inflow to the asset class.

Geopolitics isn’t helping. The first high-level U.S.-China talks since President Joe Biden took office descended into bickering last week, illustrating the divide that remains between the two nations. Russia’s President Vladimir Putin fired back at Biden after the U.S. leader accused him of being “a killer.”

At the same time, emerging markets will continue to be beholden to U.S. Treasury yields as inflation expectations rise. The market will have to absorb supply this week that will include a $62 billion offering of seven-year debt, a maturity that was pummeled last month. The yield on the benchmark 10-year Treasury climbed for a seventh week in the five days through Friday, the longest rising streak since early 2018.

There’s a “decent chance for more pain” for sovereign developing-nation fixed income, said Danny Fang, a strategist at BBVA in New York. “The rise in U.S. rates is a reflection of the ongoing inflation concerns. There are inflation concerns in parts of the emerging markets too, but beyond inflation, the higher U.S. rates can lift local rates up too on a short-term basis as well.”

Turkey’s lira tumbled on Monday after President Recep Tayyip Erdogan removed the country’s third central bank governor in less than two years and replaced him with an advocate of lower rates. The Turkish central bank delivered a 200 basis-point hike last week, double what was forecast in a Bloomberg survey.

Listen to the EM Weekly Podcast: U.S. Treasury Auctions; Turmoil in Turkey

Central Bank Watch

  • Central banks in Thailand and the Philippines are expected to keep their policy rates on hold this week to support economies that are slowly recovering from the pandemic.
  • Thailand’s policy makers are due to decide on Wednesday. They last cut the benchmark rate in May to a record-low 0.5%. The baht is the worst-performing emerging Asian currency this month with a loss of more than 2%
    • “Although policy support is still warranted, the emphasis is on targeted measures,” Krystal Tan, an economist at Australia & New Zealand Banking Group Ltd. in Singapore, wrote in a note. One is support for tourism-related businesses by allowing them to temporarily park their assets with lenders in exchange for credit, she said
  • The Philippine central bank will probably look past quickening inflation and focus on maintaining support for the economy. Officials aren’t inclined to tighten monetary policy at this time as inflation expectations remain anchored and price pressures are transitory, Governor Benjamin Diokno said this month. The rate is at an all-time-low 2%. The peso is little changed this month
    • “We believe this central bank will see through inflation and focus instead on growth,” Prakash Sakpal, senior Asia economist at ING Groep NV in Singapore, wrote in a note
  • China kept its loan prime rates -- benchmarks for banks’ corporate lending rates -- steady for an 11th month on Monday
    • The People’s Bank of China is trying to strike a balance between normalizing policy and not adding monetary fuel to asset prices bubbles while also providing enough support for the economy to continue to recover, according to Bloomberg Economics
  • South Africa’s central bank will likely hold the key rate for a fourth meeting even as fuel and electricity price increases due in April are set to push inflation closer to the midpoint of its target range
  • While markets are pricing in steady monetary policy in Mexico for at least three more months, the Banxico meeting on Thursday is still likely to offer clues on the path ahead
  • Policy makers in Colombia will probably leave the key borrowing rate unchanged on Friday, according to economists surveyed by Bloomberg, though traders will be interested in any forward-looking guidance
  • Investors will watch the release of Brazil’s central bank minutes on Tuesday for details behind the decision to raise rates by more than expected last week

    • Inflation data on Thursday may add to pressure for further increases
    • Investors will be wary of any signs of political pressure on the monetary authority as it embarks on a tightening cycle
    • Administrative and tax reform agendas may be also monitored as the nation’s fiscal position deteriorates
    • The real is among the worst-performing emerging-market currency this year
  • Hungary, Czech Republic, Nigeria and Ghana are also set to leave rates unchanged

Key data and events

  • Taiwan reported Monday that export orders rose 48.5% to $42.6 billion in February
    • The nation will report industrial production figures on Tuesday
  • Thailand will release trade figures for February from the customs department on Wednesday. The trade balance turned into a deficit in January for the first time in 12 months
  • Malaysia is due to report inflation data on Wednesday. Prices, which have been on a deflationary trend since March 2020, may have risen in February as fuel and commodity prices increased
  • Mexico will post fresh consumer-price inflation figures on Wednesday, and retail sales and economic activity in Thursday

©2021 Bloomberg L.P.

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