EM bonds on cusp of rally at mercy of Fed, trade talks

Emerging-market bonds are close to signalling a rally ahead of what’s shaping up to be a pivotal week, with traders standing by for the Federal Reserve’s first policy decision of 2019 and a crucial moment in the US-China trade talks.

A JPMorgan Chase & Co measure of emerging-market sovereign bond yields is a whisker away from falling below its 200-day moving average, an occurrence that’s heralded gains on all five of the previous occasions it’s broken through such a level since 2008. While the Fed is likely to keep interest rates unchanged on Wednesday following nine hikes since 2015, investors are betting on a dovish tilt from Chairman Jerome Powell.

“The market will need confirmation of a dovish bias by the Fed to maintain the positive momentum; anything less could lead to a sharp correction,” said Anders Faergemann, a fund manager at PineBridge Investments in London, which has $90 billion in assets. “We dialled up risk earlier in the year to take advantage of higher carry in EM and are looking for a potential reversal in the dollar as the US economy slows down and the Fed pause may turn into a hold.”

A Bloomberg foreign-exchange index that measures carry-trade returns from eight emerging markets, funded by short positions in the dollar, formed a bullish golden cross on January 18 when its 50-day moving average climbed above its 200-day equivalent. The last time this pattern was formed was in March 2017, heralding a 10-month advance in developing-nation currencies.

Investors who have been adding to their emerging-market holdings are also hoping for more evidence of a trade truce when China’s Vice Premier Liu He begins two-day talks with US Trade Representative Robert Lighthizer. But tensions between Washington and Beijing are about to get more complicated, with the World Trade Organization poised to begin an investigation into President Donald Trump’s tariffs on $250 billion of Chinese goods.

Risk of ‘Twitter barrage’

The Geneva-based WTO is likely to launch an inquiry on Monday into whether the US duties run afoul of a requirement that all its members give each other the same tariff treatment, as China asserts. If a trade deal between the world’s two largest economies isn’t reached by March 1, the Trump administration has threatened to raise the tariff rate on $200 billion in Chinese goods to 25% from 10%. “Setbacks in the negotiations run the risk of attracting the ire of President Trump, who may set off a Twitter barrage against China, which would likely have a negative impact on especially the FX markets,” said Per Hammarlund, the chief emerging-markets strategist at SEB SA in Stockholm. Economists expect China’s Caixin manufacturing PMI due Thursday to drop a notch below the 50 level that indicates contraction.

Turkey’s inflation report

Turkey’s central bank publishes its quarterly inflation report on Wednesday. Investors will be scouring the release and the accompanying presentation by Governor Murat Cetinkaya for policy clues as consumer prices start to slow. The lira was the biggest gainer, after the South African rand and Argentine peso, in emerging markets last week; Turkish Finance Minister Berat Albayrak predicted a “soft landing’ ’ for the economy after bouts of currency turbulence.

India’s pre-election budget

India is scheduled to present its final budget on Friday before a high-stakes election due by May. Prime Minister Narendra Modi is under pressure to shore up popular support after his Bharatiya Janata Party lost control of key states in polls last month. “Growth will outweigh fiscal discipline as the Modi administration pushes its way for a second term in the general election,” Prakash Sakpal, an economist at ING Groep NV in Singapore, wrote in a note. Persistently weak public finances will keep local government bonds and the Indian rupee under pressure, he said. The rupee is the worst-performing emerging-market currency this year versus the dollar after the Romanian leu.

Venezuela bondholders celebrate protests

Growing protests in Venezuela will keep pressure on the government of President Nicolas Maduro after National Assembly leader Juan Guaido claimed the presidency. Venezuela abandoned its decision to sever diplomatic ties with the US, retreating from days of bellicose rhetoric prompted by the US decision to recognise National Assembly leader Juan Guaido as the nation’s rightful head of state. Republican Senator Lindsey Graham said President Trump spoke to him about the possibility of using military force in Venezuela as recently as a couple of weeks ago, Axios reports, citing a phone interview with Graham. Venezuelan bonds maturing in 2027 climbed last week as investors bet the unrest could eventually lead to debt restructuring.

Brazil congress takes on pension plan

Investors are hoping that Brazil’s Congress, which reconvenes Friday, can finally pass a reform bill for the nation’s bloated pension system, in an effort to tackle the country’s budget deficit. The legislation is being pushed by President Jair Bolsonaro, but may face pushback from legislators.

The real edged lower last week despite a charm offensive by Bolsonaro in Davos Iron ore giant Vale SA’s board is considering suspending dividend payments following the collapse of a tailings dam Friday in the state of Minas Gerais which killed 58 people, with more than 300 still missing, and destroyed buildings. Brazil’s second deadly dam accident in little more than three years comes at a time of environmental and mining-reform plans.

Economy under AMLO

Mexico’s fourth-quarter gross domestic product report is due on Wednesday, providing clues on the strength of the economy at a time when Andres Manuel Lopez Obrador is bedding down in the presidency. Forecasts show growth slowing to 2% from 2.5% a year earlier Mexican stocks and the currency have rallied since Lopez Obrador took office in December.

Bets on Chile rate hike

Chile’s central bank will probably boost interest rates on Wednesday as the economy recovers. The peso marked its fourth week of gains Hungary’s central bank will probably maintain its hawkish stance at a rate meeting on Tuesday, without announcing the start of tightening just yet, as core price pressures continue to brew. Investors expect policy makers to announce the unwinding of unconventional stimulus in March, when the central bank will publish updated economic forecasts Kenya, Ghana, Colombia and Ukraine will likely hold rates steady. 

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