Troublesome Trio in Emerging Markets Face Yield Spike Scare

LAGOS (Capital Markets in Africa) — Eight years ago, when the taper tantrum roiled emerging markets, the so-called Fragile Five of Turkey, Brazil, South Africa, India and Indonesia suffered the most. Another spike in U.S. Treasury yields is threatening to wreak havoc on at least three of those nations.

The Turkish lira, Brazilian real, and South African rand led major global declines last week in the worst developing-nation currency selloff since late September. Those exchange rates have the highest one-week implied volatility in the world, with some analysts warning of more pain ahead.

“Higher U.S. interest rates leave all EMs vulnerable,” said Robin Brooks, chief economist of the Institute of International Finance in Washington. This is especially the case for “big current-account deficit countries like Turkey and places where fiscal expansion in 2020 causes markets to question funding needs in 2021. The latter affects Brazil and South Africa,” he said.

A key feature of the 2013 taper tantrum was that senior Fed officials – early on – welcomed higher rates, arguing that higher rates reflected better fundamentals. That caused markets to test the Fed and ultimately led to an overshooting of interest rates. We are on that path now…

Benchmark 10-year Treasury yields surged last week to the highest in more than a year, leading traders to bring forward their expectations about how soon the Federal Reserve will tighten policy. For now, officials are stressing the central bank has no plans to raise interest rates given the lingering weakness in the labor market. That will make Fed Chairman Jerome Powell’s comments on Thursday at a Wall Street Journal event all the more interesting.

In the developing world, dollar-denominated and local bonds endured their worst month since March 2020, while stocks posted their biggest weekly decline in almost a year. MSCI Inc.’s emerging-market equity index slid below its 50-day moving average, indicating additional weakness may lie ahead. Meantime, a JPMorgan Chase & Co. gauge tracking volatility in developing-nation assets jumped last week by the most since early August.

“In the absence of a more concerted effort to slow the spike in yields, emerging markets may remain under pressure,” said Ilya Gofshteyn, a senior strategist at Standard Chartered in New York. “Higher-yielding currencies will continue to be particularly adversely affected and duration across emerging markets is also likely to remain especially vulnerable.”

OPEC+ will meet on Thursday, setting the stage for another potential conflict between Russia and Saudi Arabia after last year’s oil-price war. The same day, Malaysian policymakers are forecast to keep their benchmark rate at a record low of 1.75%. Elsewhere, Turkey may report quickening inflation, while purchasing managers’ index figures will provide health checks for South Korea and Russia.

What to Watch
China’s National People’s Congress will hold its annual session on March 5, featuring President Xi Jinping and other top leaders. This year’s gathering marks the 100th anniversary of the founding of the Communist Party of China. The event may last shorter than the regular two weeks because of the pandemic

The proposed agenda includes an examination of the economy and the 14th five-year plan, Xinhua reported

The Chinese People’s Political Consultative Conference, an advisory body whose annual meeting is held in conjunction with the NPC, will gather on March 4, according to Xinhua
The meetings probably won’t set a GDP growth target but will emphasize “high-quality” growth considering Covid-19 is still widespread outside China, Iris Pang, an economist at ING in Hong Kong, wrote in a note

The yuan is the best-performing currency in emerging markets this year

U.S.-Saudi relations will be monitored after an American intelligence report implicated Saudi Arabia’s Crown Prince Mohammed bin Salmanin approving the killing of Washington Post columnist Jamal Khashoggi, an act President Joe Biden called “outrageous”

Nigeria’s central bank governor suggested the currency was devalued. Governor Godwin Emefiele said the official exchange rate now stands at 410 per dollar. That’s 7.6% weaker than the rate of 379 published on the central bank’s website.

Brazilian lawmakers are slated to pick up the debate around emergency cash handouts. The real is the worst-performing currency in Latin America this year to date

Bank Negara Malaysia:
Malaysia’s central bank is forecast to keep its overnight policy rate at a record low 1.75% on Thursday. Traders are reducing bets on further easing amid a surge in global bond yields
“Stringent social containment measures have dented Malaysia’s growth recovery trajectory,” Kanika Bhatnagar, an economist at Australia & New Zealand Banking Group Ltd. in Bangalore, wrote in a client note. “Monetary policy will remain accommodative, with the central bank continuing with its purchases of government bonds and carrying out reverse repo operations”
The ringgit has weakened 0.8% this year amid an extended lockdown and a delay in vaccine rollouts. At the same time, rising oil prices are starting to improve the outlook for the currency for emerging Asia’s only exporter of the commodity

Key Data
China’s manufacturing activity dropped further in February as the Lunar New Year holidays disrupted production, while travel restrictions to contain virus outbreaks cut spending on services.
PMI data released Monday showed manufacturing expanded in Indonesia, Philippines and Vietnam last month, while it continued to shrink in Malaysia and Thailand. South Korea and Taiwan will report similar data Tuesday

South Korea said Monday that exports rose for a fourth month in Febuary amid the global recovery. January industrial-production numbers are due Tuesday, and final fourth-quarter GDP figures are scheduled for Thursday. The won has lost 3.3% this year

Indonesia said on Monday that consumer prices rose 1.38% year-on-year in February. South Korea will publish CPI numbers Thursday, and the Philippines and Thailand on Friday
Philippine real yields turned negative in January after CPI rose to the highest level in two years.

South Korea will post foreign reserves data Thursday, followed by Indonesia, Malaysia, Taiwan, Thailand and the Philippines on Friday

Turkey’s economic growth outpaced that of its major competitors in the final quarter, as rate cuts and a spending-and-credit binge beat back virus restrictions even as the lira sank, data is forecast to show Monday
The lira has trimmed gains to 0.2% after being the best-performing currency this year

Russia’s purchasing managers’ index, due Monday, is set to pick up in February compared with a year ago

A reading of Brazil’s GDP on Wednesday is expected to show strong levels of growth in the final three months of 2020 as Latin America’s biggest economy recovered from the shock of Covid-19
Traders will also monitor January industrial production figures, to be released on Friday, for signs of a comeback

In Mexico, the central bank will probably raise its GDP growth forecasts for this year and next when it publishes its quarterly inflation report on Wednesday, according to Bloomberg Economics
​​​​​Colombia’s February consumer price inflation figures are expected to show a contraction from a year earlier amid weak domestic demand

The results may have an impact on investor expectations for the central bank to remain accommodative

While traders may see evidence of a recovery in Chile’s January economic activity data, to be released on Monday, Bloomberg Economics expects the gauge to linger below its pre-pandemic levels
A reading of confidence will also be watched for signs of a comeback as vaccines are rolled out.

Source: Bloomberg Business News