Treasuries Reprieve Buoys Emerging Markets, but Buyers Are Picky

Even with this month’s retreat in Treasury yields, investors could be forgiven for taking a cautious view of emerging markets.

The renewed surge in Covid-19 infections from India to Argentina and political risks in Turkey and Peru have made investors more selective. The recent plunge in Indian assets is a reminder the global fight against Covid-19 isn’t over yet for many developing economies, even though an environment of stabilizing U.S. yields would bode well for emerging-market currencies and bonds, Citigroup Inc. said in a report.

With the Federal Reserve set to maintain a dovish stance at a policy meeting this week, investors are looking to snap up assets pummeled by the first-quarter Treasury-market selloff and the global pandemic. Morgan Stanley is touting emerging-market local bonds, which gained for a third week in the five days through Friday after underperforming other risk assets this year. Barings U.K. finds value in corporate bonds in Brazil and Turkey after their spreads widened along with sovereign debt.

“At this stage, we think that rotation from emerging-market outperformers to underperformers will help drive markets,” said Jon Harrison, a managing director for emerging-market macro strategy at TS Lombard in London. U.S. growth will probably drive Mexican stocks, while China’s market lags behind peers as President Xi Jinping targets the nation’s tech giants, he said.

Listen: EM Weekly Podcast: Fed Meeting; Covid Surge; Turkish Tensions

Economic data will serve as a guide on the progress of the global recovery. Mexico, South Korea and Taiwan will unveil gross domestic product data, while China is due to report April purchasing managers’ indexes on Friday.

Turkey will continue to capture the market’s attention after the lira overtook the Argentine peso as this year’s worst-performer among peers.

Lira Bears Wake

  • Turkey rejected President Joe Biden’s recognition of the mass killing of Armenians in 1915 as a genocide, saying the U.S. had opened “a deep wound that undermines our mutual trust and friendship”
  • The lira had its worst week in the five days through Friday since President Recep Tayyip Erdogan’s shock dismissal of the nation’s central bank chief after he raised interest rates in March. Concern that Turkey’s relations with the U.S. will fray and the government may again dip into its foreign-exchange reserves weighed on the currency
  • The new governor, Sahap Kavcioglu -- a newspaper columnist and critic of high interest rates -- is due to hold his first press conference on the inflation outlook on Thursday
    • Bloomberg Economics expects the central bank to increase its year-end forecast for price gains because of higher oil prices and a weaker lira

Rate Decisions

  • Colombia’s central bank is expected to leave its key rate on hold Friday while reiterating that policy makers are monitoring new developments, keeping the door open for potential change. Investors will also monitor any updates on tax-reform plans
    • The peso was one of the worst performers in emerging markets last week
  • Egypt’s central bank is likely to leave the world’s highest real interest rate unchanged Wednesday, keeping global investors drawn to its debt

What Else to Watch

  • South Korea will publish first-quarter gross domestic product numbers on Tuesday, while Taiwan will release GDP data on Friday. The two economies are among those leading Asia’s recovery from the pandemic
    • “We expect South Korea’s GDP growth to continue to recover and see upside risks on the back of strong exports and investment activities,” Citigroup Inc. economists including Johanna Chua in Hong Kong wrote in a note. “However, we think uncertainties around the virus and vaccine distribution cannot be ignored, and thus private consumption is likely to remain weak with only a small and uneven recovery across different sectors”
  • Taiwan’s economy is expected to remain strong due to resilient exports and normalizing local activities, Citigroup said. The bank forecasts annual growth of 1.2% for South Korea and 6.1% for Taiwan
    • While the U.S. dollar has strengthened against most of its Asian peers this year, Taiwan’s currency has held firm, appreciating more than 1%. South Korea’s won has dropped 2.4%
  • China is due to report April manufacturing and non-manufacturing PMI on Friday
    • “China’s PMIs are likely to show the economy sustaining momentum into the second quarter, with the industrial and services sectors picking up,” Bloomberg Economics analysts including Chang Shu in Hong Kong wrote in a note
  • Malaysia will publish trade data for March on Wednesday, and Thailand will release its own report on Friday
    • The Malaysian ringgit and Thai baht are among the biggest losers in emerging Asia this year
  • In Mexico, a reading of February economic activity on Monday is expected to flag a recovery while lingering below pre-pandemic levels
    • On Friday, preliminary first-quarter gross domestic product figures will probably show a year-over-year decline as the recovery continues with less momentum
    • The Mexican peso is one of the top performers in emerging markets in the past month
  • Traders will monitor political tension in Brazil amid a senate probe into the government’s response to the pandemic
    • A reading of the nation’s bi-weekly CPI data, scheduled for Tuesday, will also be watched ahead of a May 5 central bank meeting
    • Brazil will also post current account data on Monday, as well as primary budget balance and unemployment figures on Friday
  • Investors will weigh prospects for Chile’s third round of early pension withdrawals, which is driving tension among the nation’s politicians
    • The government on Monday will submit a proposal letting citizens access as much as 10% of their retirement savings, Chilean President Sebastian Pinera said late on Sunday
    • Chilean unemployment and retail sales data for March will be released on Friday, alongside copper-production and manufacturing figures

©2021 Bloomberg L.P.

BQ Install

Bloomberg Quint

Add BloombergQuint App to Home screen.