Emerging markets offer litmus test for traders’ bold rate bets

(Bloomberg) – When it comes to betting on higher borrowing costs in developing countries, some investors may be getting ahead of themselves. increases that what economists say is currently justified on the basis of the inflation outlook. “Almost all of them are overvaluing the tightening,” said Shamaila Khan, head of emerging market debt at AllianceBernstein in New York, whose $ 4.7 billion high yield bond fund surpassed 86% of peers. The positioning reflects a common motive in the markets: After months of Covid-19 lockdown, there is a risk that policymakers will run their economy hot, only to turn back the clock with sharper-than-expected rate hikes. But the debate carries additional weight in emerging markets, an asset class that is particularly sensitive to the Federal Reserve’s position. And it suggests how trades could quickly relax on any sign of policy remaining loose, potentially rewarding investors willing to look beyond the bearish outlook.In Mexico, for example, market prices for swaps suggest that a cycle of The hike could start as early as August, even though the majority of economists say the central bank will refrain from tightening until at least February. It’s a similar story in South Africa, where forward rate deals call for a 70% chance of a 50 basis point jump in six months, while Bloomberg’s monthly survey shows the rate remains unchanged until the end of the year. Meanwhile, South Korea’s forward rate deals call for a rate hike of nearly 25 basis points over the next six months. In contrast, most economists do not foresee any change. In this context, Khan of AllianceBernstein said that his fund favors the local debt of South Africa, Mexico and Russia, “where the markets have taken too much into account the trajectory of key rates”. Officials may be able to start discussing the appropriate time to scale back their bond buying program at upcoming policy meetings, Federal Reserve Vice Chairman Richard Clarida said last week. In India, traders canceled their bets on the rate hike last month as policymakers turned to a bond-buying program to prop up the economy against a new wave of infections. The Reserve Bank of India is expected to keep its benchmark interest rate unchanged on Friday and announce further bond purchases as the economy grapples with localized lockdowns implemented by most states. Market prices suggest there is value in the front end of the yield curve, including in South Korea and Poland. This is a view shared by Edwin Gutierrez, head of emerging market sovereign debt at Aberdeen Asset Management in London. South Africa and Mexico, because we think the price curve in an upward rate path is not likely, ”he said. Market correction This is not to say that caution is not warranted. The Citi EM Inflation Surprise Index is at its highest since 2008, a reminder of the number of investors caught off guard by the resurgence of inflation. “The risks are likely tilted towards a faster tightening rather than a slowdown,” said Duncan Tan, strategist at DBS Bank Ltd. in Singapore. Inflation data from South Korea to Turkey and Poland this week may offer clues on the way to monetary policy. In Mexico, traders will be watching the central bank’s quarterly inflation report on Wednesday for signs that the monetary authority may take a less accommodative outlook. a correction, “said Eugenia Victorino, head of Asia strategy at Skandinaviska Enskilda Banken AB in Singapore.” The market is already forecasting more hikes than fundamentals suggest, “she said. benchmark interest rate at 4% to help prop up economy after surge in coronavirus infections weighed on growth Investors will seek comment on debt purchases, which have been pegged at $ 1 trillion rupees ($ 13.8 billion) this quarter. Bloomberg Economics expects bond purchases to amount to around Rs 1 trillion to Rs 1.5 trillion for the third quarter of the current fiscal year, and the introduction of additional liquidity measures to support small and medium-sized businesses. Monday, which should show that a recovery was underway before the latest wave of viral infections. The rupee strengthened 2.3% this month, Asia’s best performance Israel’s central bank may keep its base rate at an all-time high of 0.1% on Monday as it gives the economy reopened more room for recovery the benchmark rate at 14.5%, the lowest since 2012, as slow vaccine rollout leaves the economy vulnerable to a third wave of infections, according to Bloomberg Economics The pace of recovery in region as investors assess whether stock valuations are strained China to release manufacturing PMI for May on Monday as economists expect further expansion The yuan has broken above key levels that have held steady over the past three years last week and South Korea on Wednesday, while Thailand and the Philippines report theirs on Friday South Korea is expected to say e According to Bloomberg Economics, underlying strength in external demand surged again in May in its monthly trade figures. Exports likely rose around 13% from May 2019, he said, Turkey’s CPI data will be closely watched on Thursday after the lira fell to an all-time high on Friday, fearing that monetary policy remains too loose to curb accelerating inflation Consumer prices likely rose 17.3% in May after a recent fuel tax hike, from 17.1% the previous month , Turkey will also release data on Monday, which will likely show that the economy grew faster in the first quarter compared to the previous year. Tuesday will be closely watched by investors weighing the scope of the recovery against the risks associated with the country’s financing needs and skyrocketing debt Industrial production data, to be released on Wednesday, is expected to provide the first aggregate reading of second-quarter growth, according to Bloomberg Economics. The real was the best performer in Latin America in May Chilean unemployment, retail sales and copper production data for April will all be released on Monday, giving investors a better idea of ​​how the country is facing the pandemic. in April, forecast Tuesday, will likely increase from a year earlier, as growth has benefited from expansionary fiscal and monetary policies, according to Bloomberg Economics Peruvian inflation through May is expected to be relatively stable, according to Bloomberg Economics. Investors will be watching the nation’s assets as a high-stakes presidential election draws closer. Default and Restructuring Belize bondholders have until Tuesday to give their consent to extend the grace period on an interest payment due last week through September. The country’s dollar bonds have the worst yield on average this year among emerging market sovereign bonds tracked in a Bloomberg Barclays index Suriname to outline the elements and principles of its debt restructuring plans on Wednesday More stories like this are available on the most reliable source of business information. © 2021 Bloomberg LP

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