Bloomberg

Rate hike bets in emerging markets are inflated, Fund Fund say

(Bloomberg) – When it comes to wagering on higher borrowing costs in developing countries, some investors might overtake themselves. In markets from South Africa to Mexico and South Korea, traders are aiming for a faster rate of interest rate hikes than economists currently believe is justified by the inflationary outlook. “Almost all of them are exaggerating the tightening of pricing policies,” said Shamaila Khan, head of emerging market bonds at AllianceBernstein in New York, whose high-yield bond fund of 4.7 billion 86% of the competition last year. The positioning reflects a common motive in the markets: After months of Covid-19 lockdowns, there is a risk that policymakers will run their economies hot only to decline across the board with higher-than-expected rate hikes the emerging markets, an asset class that is particularly sensitive to the attitude of the US Federal Reserve, additional weight. It suggests how if there are signs of loose policy, trade could quickly unwind, potentially rewarding investors willing to look past the bearish outlook. In Mexico, for example, swap market prices suggest that a rate hike cycle could begin as early as August, although the majority of economists say the central bank will refrain from tightening until at least February. Something similar is true of South Africa, where forward rate agreements price in a 70% probability of a 50 basis point increase in six months, while Bloomberg’s monthly survey shows the interest rate will remain unchanged through the end of the year. Meanwhile, South Korea’s forward rate agreements are pricing in a rate hike of nearly 25 basis points over the next six months. In contrast, most economists predict no change. With that in mind, AllianceBernstein’s Khan said her fund favors local debt from South Africa, Mexico and Russia, “where the markets have over-priced in terms of the policy rate path.” Officials may be able to discuss the appropriate time to scale back their bond-buying program at upcoming policy meetings, Fed vice chair Richard Clarida said last week. which increases the need for further incentives. The central bank of Ghana defied expectations on Monday by cutting its key interest rate to the lowest level in more than nine years. The monetary authority in Chile said the timing of the start of rate hikes was uncertain due to factors such as an uneven recovery and a weak labor market. In India, traders withdrew their rate hike bets last month when policymakers turned to a bond. Purchase program to support the economy against another wave of infections. The Reserve Bank of India is likely to leave its policy rate unchanged on Friday and announce further bond purchases as the economy grapples with localized lockdowns in most states. HSBC Holdings Plc sees the prospect of central bank support scaling back later than the current market, with pricing suggesting that there is value at the front end of the yield curve, including in South Korea and Poland. This view is shared by Edwin Gutierrez, Head of Emerging Markets Debt at Aberdeen Asset Management in London. “We are long in South Africa and Mexico as we believe the curve is taking a rate hike path that is not likely,” he said. That is not to say that caution is inappropriate. The Citi EM Inflation Surprise Index is at its highest level since 2008 and is a reminder of how many investors have been surprised by the resurgence of inflation. “The risks are likely to be focused on faster tightening rather than slower tightening,” said Duncan Tan, strategist at DBS Bank Ltd. in Singapore. Inflation data from South Korea for Turkey and Poland this week may provide clues as to where monetary policy is heading. In Mexico, traders will monitor the central bank’s quarterly inflation report on Wednesday for signs that the monetary authority may adopt a less dovish outlook, ”said Eugenia Victorino, Head of Asia Strategy at Skandinaviska Enskilda Banken AB in Singapore. “The market is already pricing in more price increases than fundamentals suggest,” she said. Listen to EM Weekly Podcast: Inflation Data Key as Tightening Betting Growth Rate Decisions The Reserve Bank of India is likely to keep its policy rate at 4% to support the economy after a surge in coronavirus infections weighed on growth in investors look for comments on bond purchases set at Rs 1 trillion ($ 13.8 billion) this quarter. Bloomberg Economics expects bond purchases of around Rs.1 trillion to Rs.1.5 trillion for the third quarter of the current fiscal year, and the introduction of more liquidity measures to support small and medium-sized businesses, The Indian government is expected to release quarterly economic growth data Monday, which is expected to rebound the recent wave of viral infections will show. The rupee is up about 2% this month, Asia’s top performerKey Data, South Korea’s retail sales and service output hit record highs in April, contrasted with industrial production, which saw a second drop from the previous month, as China on Monday signaled its tolerance of the rally’s Yuan is fading after authorities set daily fixing to weaker-than-expected levels and warned state newspapers of rapid price gains A benchmark for China’s manufacturing industry was barely changed in May, suggesting the economic recovery momentum may have peaked for now Last week, data shows Monday’s yuan rose above key levels held over the past three years, Indonesia and South Korea are expected to see inflation data for May on Wednesday, while Thailand and the Philippines will report theirs on Friday, South Korea forecast a renewed spike in exports likely in May his monthly trading numbers on Tuesday The underlying strength of foreign demand likely remained robust thereafter, according to Bloomberg Economics, base effects are being canceled out. Exports are likely up around 13% compared to May 2019. Turkey’s CPI data will be closely watched on Thursday after the lira fell to record lows on Friday as monetary policy remains too loose to contain the acceleration in inflation.Consumer prices are likely to have risen 17.3% after a recent May Fuel tax hike from 17.1% last month Turkey grew strongly this year, outperforming most major economies as it recovered from the pandemic – an expansion that came at the expense of price and currency stability. The gross domestic product rose by 7% compared to the previous year and by 1.7% compared to the fourth quarter. Brazil’s gross domestic product numbers for Tuesday’s first quarter will be closely watched by investors, who weigh the magnitude of the rebound against the risks related to the country’s funding needs and inflating debt burden, industrial production data released on Wednesday is expected to be the latest, according to Bloomberg Economics provide the first aggregated value for the growth in the second quarter. The real performed best in Latin America in May, a Tuesday reading of Chilean economic activity in April is expected to increase year-over-year as growth benefited from expansive fiscal and monetary policies, according to Bloomberg Economics. Peruvian inflation is expected to be up through May, according to Bloomberg Economics remain relatively stable. Investors will watch the country’s assets as the high-stakes presidential election approaches Default and Restructuring Argentina will withhold a $ 2.4 billion debt payment due Monday with the Paris Club and instead use a 60-day grace period to try , an agreement with the group and the avoidance of another default: The bondholders of Belize have their approval by Tuesday to extend the grace period for an interest payment due last week until September. The country’s dollar bonds have, on average, the worst returns of emerging market government bonds tracked in a Bloomberg Barclays index this year, Suriname will unveil elements and principles of its debt restructuring plans on Wednesday, the most trusted source of business news. © 2021 Bloomberg LP