Since their post-FOMC peak on January 31, both MSCI EM and MSCI EM FX have fallen. Virtually every EM currency has given up their post-FOMC gains, the lone exception being MYR (+0.2%). The worst performers have been ZAR (-6%), ARS (-3.3%), and TRY (-2.3%). This supports our belief that the liquidity and low US rates story is not enough to sustain the EM rally on its own. What’s still missing is an improved global outlook and we certainly didn’t get that with the US retail sales data.
EM FX ended the week on a soft note as the dollar remains resilient. Very weak EM PMI readings so far in January are very concerning and underscore why we remain negative on EM despite the Fed capitulating to the market and tilting more dovish. Firmer currencies should allow EM central banks that meet this week to keep rates steady.
Last year marked the first in decades when global markets ended with a net loss across most asset classes. As the investors begin to earmark potential destinations for their retreat when the time comes to cut their losses and run, they may be hesitant to funnel everything into the historical safe havens such as US Treasuries, developed market sovereigns, and gold.
The Canadian oil company navigated a challenging market backdrop to place an upsized USD350mn bond, its first in the USD market, to finance its operational investments in the Andean region, refinancing all of its outstanding 2021 notes in the process.
EM FX ended last week on a firm note, fueled by news that the US shutdown was ending (at least temporarily). This week brings some potential for more positive headlines regarding Brexit, US-China trade talks, and Fed policy. Yet all three could pose negative risks too. We believe the US rates markets still need to normalize before the dollar can get significant traction.
Reserve currencies are a kind of macroeconomic insurance, which guarantees access to financing during economic accidents. Reserve currency status can be unknowingly squandered, but it can also be sacrificed deliberately in place of undertaking macroeconomic adjustment. Which path is Trump taking?
In an exclusive interview with Bonds & Loans, Joe Delvaux, Senior Fund Manager at Duet Asset Management, delves into frontier markets, assessing their performance in 2018, providing insight into investor sentiment on broader EM assets, and takes a glimpse into what 2019 might bring.
EM FX ended the week on a soft note after rallying most of the week on the dovish shift in the Fed’s messaging. Until US rates adjust back to pricing in no US recession, it will be hard for the dollar to maintain much traction and so this EM bounce can continue. Yet other risks to EM remain in place, including slower growth in China and globally.
EM FX ended the week on a firm note as stronger than expected US jobs data fed into risk-on sentiment. Fed Chair Powell also added to the positive sentiment Friday as he addressed basically every area of concern that the markets have had with the Fed. US rates backed up but not by enough to lend the dollar much support. In this current “wait and see” period regarding the US economy and the Fed, we suspect the dollar will have trouble getting much traction and so this EM bounce could continue near-term.
The spate of trade tariffs introduced by US President Donald Trump’s administration against China in 2018 were a natural manifestation of his anti-globalist agenda and represented one of the first steps towards his long-standing pledge to “Make America Great Again”. But the retrenchment of the US has forced its long-standing allies to rethink their bilateral relationships and search for new “marriages of convenience” across the global economic and geopolitical landscape – a dynamic that is already influencing global markets, trade routes and investment flows.
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