The Bond Rally in Emerging Markets May Not Be All That It Seems

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Emerging-market bonds are on fire but there there’s a worrying subtext to the rally.

While the dollar-denominated debt of developing nations advanced for an 11th week in the five days through Friday, the longest winning streak in eight years, indexes of stocks and currencies retreated as the spread of the coronavirus showed few signs of slowing. That’s left bonds more disconnected from stocks and currencies than at any time this year.

The divergence underlines the concern that the rally may have less to do with the strength of emerging economies than the scramble for returns in a world where demand for havens is sending yields in the biggest economies ever lower. The yield on the benchmark 30-year U.S. Treasury bond dropped to an all-time low on Friday as the number of infections outside of Chinaaccelerated, fueling worries the epidemic will dent theworld economy.

“The search for yield is supported by a perception that global yields will remain low for the foreseeable future,” said Anders Faergemann, a London-based senior portfolio manager at Pinebridge Investments, which manages about $100 billion. “Yet, the resilience we have seen in EM hard-currency bonds — both sovereign and corporate — tells a story of continued support for the asset class and further capital inflows.”

MSCI Inc.’s index of emerging currencies dropped last week for the fourth week in five, sinking below its 100- and 200-day moving averages, levels that signal the potential for further declines. The MSCI stocks gauge slumped 2%.

Bank of Korea will make the difficult decision Thursday of whether to cut its benchmark interest rate to a record low, after the government raised the country’s infectious-disease alert to thehighest level. As policy makers struggle to find new ways to boost growth, attention is turning to fiscal policy. Malaysia will unveil an extra economic-stimulus package on Thursday. The start of February data releases will also give investors a clearer picture of the virus’s impact on global growth.

Coronavirus concerns aside, South African Finance Minister Tito Mboweni budget’s on Wednesday could be key to determining whether Moody’s Investors Service downgrades the nation’s debt to junk status next month. Argentina’s debt negotiations will continue, while Lebanon’s bondholders are bracing for apotential default next month.

China PMI

  • China will report official gauges of manufacturing and services for February on Saturday, providing clues on how badly the world’s second-largest economy has been hit by the virus
  • The country is slowly getting back to work, with the economy running at50%-60% capacity in the week to Feb. 21 and forecast to jump from Feb. 24, according to Bloomberg Economics
    • A monthly Standard Chartered survey of more than 500 Chinese SMEs on Monday may give an early read on business and credit conditions — helping assess the economic impact of the virus before official data becomes available

    China’s economy is likely to pick up quickly after the coronavirus is contained and stage a“V-shaped” recovery, according to a senior official with the nation’s central bank

    • The “sound” fundamentals of the domestic economy remain unchanged in the medium to long run, Chen Yulu, a deputy governor at the People’s Bank of China, wrote in an opinion piece in the Financial Times dated Feb. 20

    South Korea’s Dilemma

    • The chance of a 25 basis-point rate cut in South Korea is on the rise because domestic consumption may take a hit as virus concerns intensify, Eugene Leow, a rates strategist at DBS Group Holdings Ltd., wrote in a note. Exports — a key driver of the economy — are under threat as the outbreak rattles global supply chains and hurts demand.
      • DBS had expected the BOK to wait until April before lowering the key rate. Policy ammunition is limited given the current rate of 1.25%, when adjusted for inflation, is already at minus 0.25%, according to the Singapore-based bank

      Hong Kong, Malaysia Budgets:

      • Hong Kong will announce its budget on Wednesday.Bloomberg Economics expects the budget deficit for fiscal 2020-2021 could reach more than HK$65 billion ($8.4 billion), or about 2% of gross domestic product
      • Malaysia has already widened its deficit target for fiscal 2020 to 3.2% of GDP, from 3%
      • Indonesia is backing calls for acoordinated global response to the coronavirus outbreak, warning that authorities may be underestimating its impact on trade and economic growth

      Make-or-Break Budget

      • With South Africa’s investment-grade credit rating hanging by a thread, Finance Minister Mboweni will have to convince rating companies and investors that a rescue plan for the debt-ridden state electricity company Eskom Holdings SOC Ltd. is on track, and that the government is ready to take measures to curb rising debt, narrow the budget deficit and fuel economic growth
      • Bailouts for state-owned companies including Eskom and South African Airways have pushed up government debt in an economy growing at less than 1% a year and collecting insufficient revenue
      • The rand is the worst-performing emerging-market currency this year after Brazil’s real

      Trump Visits India

      • President Donald Trump visits India on Feb. 24-25. Prime Minister Narendra Modi’s administration was hoping a trade deal could be reached after improving its offer for market access to American products
      • “We have low expectations for more substantial progress in trade talks,” Shilan Shah, a senior India economist at Capital Economics Ltd. in Singapore, wrote in a note. There have been suggestions India could ramp up purchases of U.S. defense equipment in exchange for the restoration of preferential trade status but the affected goods are worth only 0.2% of Indian GDP, Shah said
      • Read: Trump Raises Doubts Over India Trade Deal Ahead of Visit
      • India will release fourth-quarter GDP data on Friday. Emerging Asia’s second-largest economy probably grew 4.7% from a year earlier, compared with 4.5% in the prior quarter, according to a Bloomberg survey

      Argentina and Lebanon

      • Argentina Economy Minister Martin Guzman and International Monetary Fund Managing Director Kristalina Georgieva discussed plans for a“secure and orderly resolution” of Argentina’s debt situation, the IMF said on Saturday
        • The nation will probably release December data that show wages once again rose less than inflation, according to Bloomberg Economics

        Turkey GDP, Mexico Inflation

        • Thailand reports January customs data on Monday
        • South Korea will unveil January industrial production statistics on Friday
        • Economic growth in Nigeria probably slowed to 2.2% year-on-year in the fourth quarter, from 2.3%, according to the median estimate in a Bloomberg survey. The data may be released on Monday
        • Turkey’s economic growth accelerated to 5% year-on-year in the fourth quarter, from 0.9%, as interest rate cuts and a weakening currency helped fuel output, according the median estimate of economists in a Bloomberg survey. The data are due Friday
        • Norway’s sovereign wealth fund, the world’s biggest, publishes its annual report on Thursday. The fund said less than a year ago it got the go-ahead to cut government and corporate bonds from emerging markets in an overhaul of its fixed-income holdings
        • Mexico’s central bank will release its quarterly inflation report on Wednesday and meeting minutes on Thursday, which may shed light on its economic health and future policy stance. Final fourth-quarter GDP figures are expected to be released on Tuesday. Bloomberg Economics expects a wider than initially estimated contraction
        • Brazil’s week is shortened by the Carnival holiday, with markets resuming trading on Wednesday afternoon. Investors will look for January primary budget balance data on Friday
        • Chilean unemployment, copper production and retail sales figures on Friday will inform investors weighing the risks of a constitutional referendum in April

        — With assistance by Karl Lester M Yap, and Aline Oyamada

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