Bets on emerging market rate hikes turn excessive, funds say

(Bloomberg) – When it comes to betting on higher borrowing costs in developing countries, some investors may get ahead. In the markets from South Africa to Mexico and South Korea, traders are forecasting a faster rate of interest rates. increases that what economists say is currently justified on the basis of the inflation outlook. “Almost all of them are excessive price tightening,” said Shamaila Khan, head of emerging market debt at AllianceBernstein in New York City, whose $ 4.7 billion high-yield bond fund has topped 86% of peers over the past year. The positioning reflects a common motive in the markets: after months of a Covid-19 blockage, there is a risk that policymakers will heat up their savings, only to then backtrack with larger-than-expected rate hikes across the board. But the debate carries additional weight in emerging markets, an asset class that is particularly sensitive to the Federal Reserve’s position. This suggests how trades could proceed quickly if there is any sign of policy remaining loose, which could reward investors keen to look beyond the bearish outlook.In Mexico, for example, market prices for swaps suggest that a bullish cycle could start as early as August, although 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 agreements provide for a 70% chance of a 50 basis point jump in six months, as Bloomberg’s monthly survey shows the rate will remain. 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. Against this backdrop, Khan of AllianceBernstein said his fund favored local debt in South Africa, Mexico and Russia, “where markets have over-integrated the path of key rates.” Officials may be able to start discussing the appropriate time to scale back their bond buying program at upcoming policy meetings, Fed Vice Chairman Richard Clarida said last week. Overcoming inflation At the same time, the coronavirus continues to spread to large areas of the developing world. , adding to the need for more stimulus. Ghana’s central bank defied expectations on Monday by slashing its benchmark interest rate to the lowest in more than nine years. The Chilean Monetary Authority said the timing of the start of interest rate hikes remains uncertain due to factors such as an uneven recovery and a weak labor market. In India, traders settled their bets on the rate hike last month as policymakers turned to a bond. purchasing program to support 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 debt purchases as the economy grapples with localized lockdowns implemented by most states. 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. “We are long for South Africa and Mexico because we believe that 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 slower,” said Duncan Tan, strategist at DBS Bank Ltd. in Singapore. Inflation data from South Korea to Turkey and Poland this week could offer clues on the way forward for 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, Asia Strategy Manager at Skandinaviska Enskilda Banken AB in Singapore. “The market is already forecasting more hikes than fundamentals suggest,” she said. Listen to the EM Weekly podcast: Inflation Data Key as Bets on Growth Decisions Tighten The Reserve Bank of India should keep its benchmark interest rate at 4% to help support the economy after a wave of 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 be around Rs1 trillion to Rs 1.5 trillion for the third quarter of the current fiscal year, and the introduction of more liquidity measures for supporting small and medium-sized businesses The Indian government is expected to release quarterly economic growth data on Monday, which should show a recovery was underway before the latest wave of viral infections. The rupee has strengthened by around 2% this month, the best performance in Asia South Korea’s retail sales and services output hit record levels in April, contrasting with industrial output which saw a second month-over-month contraction China reported on Monday that its tolerance for the yuan rebound is fading after authorities set the daily fix lower than expected and state newspapers warned of quick gains A gauge of China’s manufacturing industry changed little in May, suggesting that the economic recovery momentum may have peaked so far, data on Monday showed that the yuan broke through key levels that have held up for the past three years last week. Inflation data for May is due from Indonesia and South Korea on Wednesday, while Thailand and the Philippines report theirs on Friday. South Korea is expected to say export figures surged again in May in its expected monthly trade figures on Tuesday Underlying strength in external demand likely remained robust even after removing base effects, according to Bloomberg Economics. Exports are likely to be up around 13% from May 2019, he said Turkey’s CPI data will be closely watched on Thursday after the pound fell to an all-time high on Friday as the pound fell to an all-time high on Friday. monetary policy remains too loose to curb accelerating inflation Consumer prices likely rose 17.3% in May following a recent fuel tax hike, from 17.1% on previous month Turkey’s economy has grown at a steady pace this year, outperforming most major economies as it recovers from the pandemic – an expansion that has come at the expense of price and currency stability. The gross domestic product increased by 7% compared to the previous year and by 1.7% compared to the fourth quarter. A reading of the Brazilian gross domestic product figures for the first quarter on Tuesday will be closely watched by investors who will assess the extent of the recovery against the risks associated with the country’s financing needs and its swelling debt burden. industry, which will 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 An indicator of Chile’s economic activity in April, expected on Tuesday, is likely to rise from a year earlier as growth 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 monitor the nation’s assets as a high-stakes presidential election approaches.Default and RestructuringArgentina will suspend payment of the $ 2.4 billion debt with the Paris Club that is due on Monday and will use instead a 60-day grace period to try to come to an agreement with the group and avoid another default Belize bondholders have until Tuesday to agree to extend the grace period on an interest payment due on the last week until 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 will present the elements and principles of its debt restructuring plans on Wednesday. More stories like this are available at Subscribe now to stay ahead of the curve with the most popular source of business information. More reliable. © 2021 Bloomberg LP

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