Selloff Puts Emerging Markets on Trial While Bulls Hang Tough

After a one-month trial of 2021, the shoppers of emerging-market assets can point to any number of reasons for wanting their money back.

Yet the balance of evidence suggests they’ll stick with the product for a while.

For all the factors that triggered last week’s selloff, the prospect of stronger growth ahead as stimulus kicks in, vaccines are distributed and restrictions lifted continues to underpin confidence.Goldman Sachs Group Inc.,Societe Generale SA andLoomis Sayles & Co. were among those talking up emerging markets in the past week, even as the Cboe Volatility Index had its biggest daily jump in about three years on Wednesday.

“I see the current backup as an opportunity to fade weakness, rather than the start of another sustained leg down,” said Ilya Gofshteyn, a senior emerging-markets strategist at Standard Chartered in New York. “Assets can rally once U.S. equity market volatility rolls over. Emerging-market currencies were on the back foot even ahead of the recent spike in VIX, so positioning is much cleaner now.”

MSCI Inc.’s gauge of developing-nation shares had the worst week since March in the five days through Friday, falling 4.5%, as the uneven rollout of inoculation programs and gyrations brought about by retail traders in U.S. markets sapped risk appetite.

Investor anxiety, as measured by expected price swings for equities, reached the highest in almost three months last week even as Federal Reserve Chairman Jerome Powell pledged to keep monetary spigots wide open. Implied volatilities across emerging-market currency pairs jumped on Friday, while local bonds fell for a third straight week.

February may still get off to a rocky start. Kicking off a week of economic releases, an official gauge of China’smanufacturing output slipped for a second month in January, while activity in the services sector slowed to the lowest reading since March, data published on the weekend showed. Most Middle East marketsretreated Sunday.

Defaults and Restructurings

• Zambiaskipped a $56.1 million coupon payment on Jan. 30 on its Eurobond maturing in 2027, the Finance Ministry confirmed Sunday

  • It became Africa’s first pandemic-era sovereign to default after it missed a $42.5 million Eurobond coupon payment in November
  • Its Eurobonds plunged the most on record on Friday
  • Chad was the first country torequest the restructuring of its external debt under the G-20 common framework

  Central Banks Decide

  • The Bank of Thailand is expected to keep interest rates on hold on Wednesday by unanimous consensus
    • Bloomberg Economicsbelieves that this does not preclude other easing measures to build on relief for retail borrowers
    • The central bank may also express further concern about the Thai baht’s strength and discuss steps to “address structural problems in the foreign-exchange market and encourage more balanced capital flows,” as described in the most recentminutes
    • The baht remained unchanged last week
    • Read:Shorter Thai Bonds in Demand Ahead of Rate Verdict: SEAsia Rates
    • However,Bloomberg Economics says the central bank has scope to ease rates after December inflation dropped to within its target band
    • If they do cut, analysts will watch how much shorter-tenor yields can fall even with the expected rate cut as the RBI has signaled its willingness towithdraw liquidity
    • The zloty was one of the biggest gainers in January among emerging-market peers
    • The regulatorpledged to return to currency interventions to avoid zloty gains and allow the economy take full advantage of ultra-lax monetary conditions

    Central Banks Intervene

    • A number of Asia’s large holders of reserves are due to report January foreign-exchange levels this week
    • January shouldn’t have been a heavy dollar-buying month given the recovery in the U.S. currency. For those countries that experienced depreciation pressure — like South Korea — the figures will provide an illustration of the asymmetric nature ofreserves accumulation; Asian countries are generally more willing to buy dollars than to sell them
    • South Korea reports on Wednesday. Valuation effects alone could reduce the figure to $441.6 billion
      • The calculations of valuation-adjusted reserves accumulation are done on the assumption that 40% of currency reserves are denominated in non-dollar currencies — broadly along the lines of the International Monetary Fund surveydata
      • The Korean won was the worst-performing Asian currency in January
      • The yuan was the strongest currency in Asia last week, as the authorities continued tobattle the attraction ofrising interest rates and corporate demand for the Chinese currency
      • Read:Yuan Bulls Take Comfort From High FX Conversion Rate: Macro View

      PMI Pulse

      • A slew of factory activity data from Indonesia to India, Russia and Brazil will offer further clues on the pace of recovery across the developing world as investors assess whether market valuations are stretched
      • January Markit manufacturing PMIs for South Korea, Taiwan, Malaysia, Indonesia, Thailand, Philippines and India are due on Monday; on average these indicators have registered eight consecutive months of improvement
        • China’s Caixin manufacturing number is due Monday, and is expected to cool in line with a decline in December new orders
        • Aside from India, the better-performing countries remain those with the least stringent lockdowns, and the greatest exposure to high-tech production — China, South Korea and Taiwan
        • The tightening of lockdown conditions across the region might constrain these figures, although U.S. Markit figures for January and strong 20-day export data from South Korea suggest risks are balanced

        Inflation Watch

        • January CPI data will be closely watched. Any sign of slowing inflation would boost real yields in a low interest-rate environment — a relief to bond investors
        • Indonesia’s number on Monday is expected to creep higher on a headline basis, but remains below the central bank’s target range
        • South Korea’s figure is due on Tuesday. Philippines, Thailand, and Taiwan report on Friday — consensus expects most to remain stable
        • A reading of Colombia’s January consumer price inflation, scheduled for Friday, may show a small increase while lingering below the target
        • Argentina’s central bank is expected to release its monthly survey on inflation expectations on Friday
        • Peruvian headline inflation for January is expected to rise from a month earlier while staying near the midpoint of target, according to Bloomberg Economics

        Other Data & Events

        • India’s budget is due on Monday
          • Bloomberg Economicsexpects the central government fiscal deficit will be targeted to narrow to 5.5% of GDP in fiscal 2022, from an estimated 6.6% in fiscal 2021
          • Gross borrowing through dated securities will likely drop to 10.6 trillion rupees ($145 billion) from an estimated 12.6 trillion rupees in fiscal 2021. However, as this would still be up from the pre-Covid level of 7.6 trillion rupees in fiscal 2020, it might not be enough to relieve pressure on Indian bond yields
          • Indian 10-year yields are up around 3 basis points thus far in 2021

          A reading of Chile’s December economic activity on Monday will probably flag a tepid recovery while lingering below levels from a year earlier

          • Investors will also monitor a gauge of January business confidence for signs that vaccinerollouts in the nation will be enough to stoke a comeback

          Meeting minutes from Colombia’s January meeting may offer investors a more dovish tone and hint at further accommodation if inflation remains subdued, according toBloomberg Economics

          • Policy makersheld their key rate at an all-time low for a fourth straight month last week

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