The dog that didn’t bark was how the IMF described inflation. But might the fall in emerging market currencies reverse the current picture of largely benign inflation?
Nick Shearn, a portfolio manager at BlueBay Asset Management, sees the rise in inflation as not an if but a when, which makes inflation-linked bonds (linkers in common parlance) a good idea. These would hedge not only against EM but also G7 inflation — he calculates the correlation between the two at around 0.8 percent. He says linkers outperform as inflation uncertainty increases, hence:
LONDON, June 6 (Reuters) – Brazil’s move to drop a tax on
foreign buying of domestic debt will allow more of its bonds to
join two JPMorgan indexes, potentially boosting inflows by at
least $2.8 billion, the bank said on Thursday.
The removal of the 6 percent IOF tax, imposed in 2010 to
fend off so-called hot money flows, could bring up to $30
billion into the local bond market, according to some estimates.
LONDON (Reuters) – Brazil’s move to drop a tax on foreign buying of domestic debt will allow more of its bonds to join two JPMorgan indexes, potentially boosting inflows by at least $2.8 billion, the bank said on Thursday.
The removal of the 6 percent IOF tax, imposed in 2010 to fend off so-called hot money flows, could bring up to $30 billion into the local bond market, according to some estimates.
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.