Most market indicators are muted this morning, which gives me a chance to say a few words on emerging markets (EM), which will be our focus today. The recent rise in the U.S. 10-year Treasury yields has had some significant global implications, especially for EM. A lot of discussions are focusing on whether we will see something like 2013 or 2016 when it comes to EM.
In 2013, we saw the famous “Taper Tantrum” when then–Federal Reserve Chair Ben Bernanke hinted at a pull back from quantitative easing. This led to a very quick reversal of capital flows whereby risk-seeking investors who had put their money into EM suddenly pulled those funds back to the U.S. in the face of more attractive U.S. bond yields. Consensus at the time also pointed to many missed opportunities that these countries had when they were the recipients of those capital flows.
In contrast, 2016 was more of a global recovery and saw investment at relatively healthy levels in both developed and emerging markets. For the moment, I think this is more like 2016, primarily because markets are expecting a strong snap-back in activity once the world is more in control of COVID-19. So like a lot of forecasting these days, there is a strong dependency on what happens with the virus.
There are two pretty interesting stories with EM at the moment that deserve mentioning though. First, there actually are some areas of the world expecting higher interest rates. Two of those are Chile and Brazil. Rates markets in those currencies are pushing their central banks to start hiking rates. In Brazil, markets are pricing in 50 basis points this month and at each future central bank meeting of the year. In Chile, markets are betting on rate hikes for the next two years even though the central bank has said it will not be doing so. The primary reason for pressure for higher rates is that these economies are actually seeing inflation as well as the need to attract foreign capital flows.
The other story in EM is how oil prices are shifting the stances of government policymakers, and it all comes down to who needs oil and who has it. With oil prices having tripled since April, those having to import their supplies will clearly have persistent inflationary pressures if oil stays elevated or gets even more expensive. That would include Chile and Brazil, but Nigeria and Turkey are also particularly vulnerable, with inflation already well over their central bank targets. Alternatively, economies that are well below their targets — like Thailand and South Africa — will be much better positioned. Take care, and have a great day. | |
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