Brazil’s finance minister Guido Mantega, one of the most shrill critics of Western money-printing, has decided to repeal the so-called IOF tax, he imposed almost three years ago as a measure to fend off hot money flows.
Well, circumstances alter cases, Mantega might say. And the world is a very different place today compared to 2010. Back then, the Fed was cranking up its printing presses and the currency war (in Mantega’s words) was raging; today the U.S. central bank is indicating it may start tapering off the stimulus it has been delivering. Nor is investors enthusiasm for emerging markets what it used to be. Brazil’s currency, the real, is plumbing four-year lows against the dollar and local bond yields have risen 30 basis points since the start of May. Brazil’s balance of payments situation meanwhile, is deteriorating, which means it needs all the foreign capital it can get, hot money or otherwise. And currency weakness spells inflation — bad news for Brazil’s government which faces voters next year.
The fierce sell-off that hit emerging market local currency debt last month was possibly down to low levels of currency hedging by investors, JPMorgan says.
Analysts at the bank compare the rout with the one May 2012, caused by exactly the same reason — higher U.S. yields. There was a difference though — back then EM currencies dropped more than 8% on the month but EM local bonds, unlike last month, were little changed.
LONDON, June 4 (Reuters) – Brazil will have to live with a
weaker local currency if its depreciation against the U.S.
dollar is in line with the movement of other currencies, the
Brazilian central bank’s director for monetary policy said on
In comments that drove down its exchange rate, the official,
Aldo Mendes, said that “there is nothing we can do” if the
depreciation of the Brazilian currency, the real, is in
synch with a global currency trend.
June 3 (Reuters) – Messy politics, economic slowdown and a
balance of payments deficit: four days of violent
anti-government protests across Turkey are reminding investors
of another emerging market – South Africa.
Hundreds of Turkish police and protesters have been injured
since Friday, when a demonstration to halt construction in a
park in an Istanbul square grew into mass protests against what
opponents call the authoritarianism of Prime Minister Tayyip
Morocco fears its stock market is on the verge of being re-classified as a frontier market when index provider MSCI announces its annual rejig of equity indices this month.
Maybe it should pray for relegation instead. A report at the end of last week by Citi notes the boom in frontier market equities — they have risen 15 percent since the start of this year, a stark contrast to their better known, more liquid emerging market cousins which have fallen around 5 percent so far this year. In fact the performance of the frontiers — comprising less liquid, smaller markets from Kenya to Kazakhstan — has been more akin to the U.S. or Japanese equity markets which have earned investors double-digit returns this year.
LONDON (Reuters) – Sell in May? They certainly did in emerging markets.
But unlike in the old adage, they are likely to sell in June and July too if investment returns in the once-hot sector keep getting slammed by moves in U.S. bond yields and the dollar.
Emerging currencies have crashed to multi-month and even multi-year lows against the dollar in the recent frantic selloff, with emerging bond funds suffering their first weekly outflow in a year, according to data from EPFR Global.
LONDON, May 31 (Reuters) – Sell in May? They certainly did
in emerging markets.
But unlike in the old adage, they are likely to sell in June
and July too if investment returns in the once-hot sector keep
getting slammed by moves in U.S. bond yields and the dollar.
Of all the emerging currency and bond markets that are feeling the heat from the dollar’s rise, none is suffering more than South Africa. A series of horrific economic data prints at home, the prospect of more labour unrest and the slump in metals prices are making this a perfect storm for the country’s financial markets.
Some worrying data from the Johannesburg Stock Exchange this morning shows that foreigners sold almost 5 billion rand (more than $500 million) worth of bonds during yesterday’s session alone. Over the past 10 days, non-resident selling amounted to 10.7 billion rand. They have also yanked out 1.2 billion rand from South African equities in this time. And at the root of this exodus lies the rand, which has fallen almost 15 percent against the dollar this year. Now apparently headed for the 10-per-dollar mark, the rand’s weakness has eaten into investors’ total return, tipping it into negative return for the year.
The received wisdom is dollar strength = weaker emerging market currencies. See here for my colleague Mike Dolan’s take on this. But as Mike’s article does point out, all emerging markets are not equal. It follows therefore that any waves of dollar strength and higher U.S. yields will hit them to varying degrees.
ING Bank says in a note sent to clients on Tuesday that emerging currency gains in recent years have been closely tied to foreign investments into domestic bond markets. Recent years have seen a torrent of inflows into local debt, driving down yields on the main GBI-EM index and significantly boosting its market value. Hence, it makes sense to examine how the GBI-EM’s biggest constituents might fare under a scenario of a surging dollar and Treasury yields (In the two years before a Fed tightening cycle commences, 5-year Treasury yields can trade 120-150 basis points higher, ING analysts point out).
The corporate bond juggernaut continues apace in emerging markets.
In a note at the end of last week, analysts at Bank of America/Merrill Lynch estimated that companies from the developing world have sold debt worth $179 billion already this year. Originally, the bank had forecast $268 billion in corporate debt issuance in 2013, a touch below last year’s $290 billion but it is finding itself, like many others, marking up its estimates.
Oleg Melentyev, credit strategist at BofA/Merrill, writes that recent bumper bond sales imply quarterly issuance is running at 10-11 percent of market size, well above the past average. Melentyev points out that the first 4.5 months of the year tend to account for 35 percent of full-year total debt sales by EM companies. If this formula were applied now, it would imply total 2013 new debt issuance at $420 billion.