Emerging Markets Gripped by Greed Now Turn to Fed for Fresh Spur

Traders are likely putting their trust in the Federal Reserve to provide the next spur to an emerging-market rally that may be showing signs of fatigue.

With Friday’s declines delivering a week-ending jolt to the bulls, some of the warning signs took on a more worrying look. The Bloomberg Barclays local-currency bond index registered its first back-to-back weekly drop since June. Bloomberg’s Fear-Greed indicator for the MSCI developing-nation stock gauge — which measures selling strength versus buying strength — climbed to its highest in almost a decade. And a basket of currencies had its worst week since the end of October.

Which is why an assurance from the Fed on Wednesday that it will keep the stimulus spigot open via an unaltered bond-buying program could be enough to comfort investors concerned about the delays to a global recovery.

“Because of continuing Covid-19 disruption, the recovery in emerging-market growth will, of course, be a stop-start one,” said Hasnain Malik, the Dubai-based head of equity strategy at Tellimer. “But pauses in emerging-market equity performance, particularly in Asia, should be viewed as opportunities.”

A slew of economic output data from countries including South Korea, Poland and Mexico this week will give further evidence of the damage from the pandemic. Excluding China,emerging-market activity fell to about 77% below its pre-virus level in the third week of January, according to Bloomberg Economics estimates.

Investor anxiety, as measured by implied volatility for currencies and stocks, jumped on Friday by the most in about two weeks. Just 24 hours earlier, optimism over additional U.S. stimulus under President Joe Biden had helped drive a gauge of developing-nation equities to an unprecedented high.

Tensions between the world’s two largest economies may also be on the radar this week, with theU.S.-China Economic and Security Review Commission due to hold a hearing on Thursday. The commission is mandated by Congress to report annually on the national security implications of the economic relationship between the two countries.

Economic Pulse

  • As the focus shifts away from U.S. politics and more governments impose lockdowns to fight the spread of Covid-19, several countries are set to report fourth-quarter growth data
  • Bloomberg Economics expect South Korea’s gross domestic product data to come in significantly below consensus, arguing that private consumption will be the main drag on growth, as the year-end virus surge and tightened social distancing measures weigh on incomes and spending
    • The won has been emerging Asia’s worst-performing currency so far this year
    • The data may come in below consensus because of “prolonged movement restrictions and limited fiscal support,” according to Bloomberg Economics. In addition, a spate of strong typhoons in October and November likely added further downward pressure
    • The numbers will be buoyed by “strong export performance, while private consumption also rebounded, in part thanks to the government’s cash vouchers and tourism subsidies,” according to Barclays
    • The authorities’ battle against local-currency appreciation continues, with aclamp down on grain companies and their banking partners
    • December industrial production numbers are also due on Monday, with the consensus expecting the year-over-year rate to cool

    Central Banks Decide

    • Hungary’s central bank is predicted to leave its benchmark rate unchanged at 0.6% on Tuesday
      • The forint is the best-performing emerging-market currency this year
      • Bloomberg Economics expects the decision to be split, as it was in December, with a few policy makers voting for a 25 basis-point cut

      What to Watch

      • Russian assets may be under pressure after supporters of opposition leader Alexey Navalny held the country’s biggest anti-Kremlinprotests since at least 2018
        • The ruble was the worst performer after Brazil’s real on Friday as oil prices declined
        • Note that the average Goldman Sachs lockdown index for the country had risen an average 6.7 points to Jan. 15 from December’s average
        • Industrial production numbers will be released on Friday. Consensus expects continued improvement in seasonally adjusted month-on-month terms, as demand for tech products remains robust
        • The figures may have shown the second-biggest increase since July 2018, according to Bloomberg Economics. This would reflect a pickup in production, double-digit growth in exports and narrower producer price deflation. A lower year-earlier base may also benefit the reading
        • Official PMIs are out on Sunday, with consensus expecting both manufacturing and services to cool
        • The Chinese authorities continue tobattle yuan appreciation with weaker-than-expected fixings and state-bank buying of dollar-yuan; the yuan remains the strongest-performing Asian currency in 2021 so far
        • Read:Surge in USD/CNY Conversion Rates Augurs Well for Yuan in 2021
        • Current-account numbers are due on Friday, and are likely to show a continued deficit of about $1 billion
        • Read:Lockdown Will Take Toll on Malaysia’s Longer Bonds: SEAsia Rates
        • The rand is one of the worst-performing currencies this year
        • Goldman Sachsrevised its forecasts for the Turkish currency again, projecting further gains in the near term but warning that “the extent of lira appreciation may be limited”

        In Brazil, investors will scrutinize a reading of the bi-weekly consumer-price index on Tuesday for further evidence of a pick-up in inflationary pressures after the central bank adopted a more hawkish tone last week

        • December’s primary budget-balance figures are due a day later; national unemployment data for the same month come on Thursday
        • The real is the worst-performing currency in emerging markets this year

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