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A less-dovish-than-anticipated Federal Reserve was always the biggest danger, and markets voted accordingly after Chairman Jerome Powell’s comments yesterday.
The rand led Thursday's retreat among currencies as the dollar headed toward a more than two-year high, stocks on the MSCI emerging-market index fell for an eighth day to edge toward a break below the gauge’s 200-day moving average, and the sovereign bonds of Turkey, South Africa, Russia and Brazil were among the biggest casualties in the fixed-income world.
With trade talks on the back-burner until September, investor attention will inevitably now focus on the growth story, making Friday’s payrolls report of greater-than-usual significance.
Follow the Fed
The logic from here is that emerging-market central banks will be further emboldened to follow in the Fed’s footsteps and keep cutting rates without worrying too much about eroding the relative allure of their own markets. Given the stronger growth rates in the developing economies - admittedly somewhat unevenly spread across the universe - and the $14trn of negative-yielding bonds out there, policy makers are unlikely to be too squeamish about providing further stimulus.
As Angus Bell, who helps oversee $45bn of developing-nation debt at Goldman Sachs Asset Management, told Bloomberg News in Singapore yesterday, the shackles are off for central banks. Local rates in the emerging markets are the place to be, he says.
Real surprise
Which brings us to Brazil, where the central bank enacted a larger-than-forecast 50 basis-point rate cut after markets closed yesterday.
Given emerging-market currencies are already getting a beating from the stronger dollar today, traders should probably brace for a bit of a slide in the real. Indeed, a drop back through the currency’s 200-day moving average of 3.83 per dollar is highly likely, as Davison Santana, Bloomberg’s Sao Paulo-based strategist, suggests.
By the same token, equity players may now see this - and the prospect of further easing to come - as the invitation they need to drive the Ibovespa index back into a bullish trend after its failure to take heart from the recent pension-reform progress.
Ukraine revival
While investors scour the world for a bit of yield, Ukraine is suddenly popping up as a serious proposition. As Bloomberg’s Aine Quinn reports today, foreigners now own about 9.4% of the nation’s hryvnia-denominated debt, up from almost zero at the end of last year.
Part of the recovery has been triggered by the country’s decision to cut back capital controls and make domestic bonds accessible via the Clearstream network in May. The days of that 48% devaluation in 2014 and subsequent debt restructuring may still be fresh in some people’s minds, but Ukraine real yields of 6% are clearly proving too enticing for some.
