Emerging markets bask in glow of US dollar weakness

JPMorgan said its client survey of emerging market funds managing US$1.1 trillion (RM4.7 trillion) showed ‘risk-on’, with funds cutting cash holdings and adding exposure to local bonds. — Reuters pic
JPMorgan said its client survey of emerging market funds managing US$1.1 trillion (RM4.7 trillion) showed ‘risk-on’, with funds cutting cash holdings and adding exposure to local bonds. — Reuters pic

LONDON, July 21 — With the dollar at 13-month lows, emerging stocks headed for a second straight week of gains today and yields on emerging currency bonds hovered at their lowest in 2-1/2-years as the sector enjoyed buoyant fund inflows.

Despite expectations that Western policymakers will soon start tightening monetary policy, including by clawing back the stimulus they have been pumping into markets for years, flows to emerging debt funds bounced to US$1.5 billion (RM6.4 billion) in the past week after two weeks of outflow, JPMorgan data showed.

Emerging equity funds received US$2.4 billion on confidence that developing economies can withstand gradual tightening from the US Federal Reserve and European Central Bank.

MSCI’s emerging equity index hovered just off 27-month highs, with year-to-date gains surpassing 23 per cent.

Emerging sovereign dollar bond spreads over Treasuries were at one-month lows around 306 basis points while local debt yields averaged 6.14 per cent on JPMorgan’s GBI-EM index, having fallen almost half a per cent over the week.

JPMorgan said its client survey of emerging market funds managing US$1.1 trillion showed “risk-on”, with funds cutting cash holdings and adding exposure to local bonds.

South African bonds extended gains after yesterday’s surprise rate cut, with benchmark yields at one-month lows and helping the rand outperform other emerging currencies with a 0.5 per cent rise.

On most currencies though, there were signs of caution. The lira rose 0.2 per cent, while the rouble was flat and Asian currencies firmed only marginally despite the dollar’s renewed weakness.

Citi analysts noted emerging currencies were on average trading at the highest levels in almost two years while total emerging market inflows were approaching levels seen just before the 2013 taper tantrum.

“While very strong inflows by themselves are no indication of an imminent turn, they do serve to increase volatility when the turn does arrive,” Citi told clients, adding it was “lightly positioned” in emerging currencies.

“It’s plausible some investors are sensing that valuation is becoming stretched. This is something which bears watching.”

There is little sign that politics — Turkey’s tussle with Germany over the detention of activists or Poland’s stand off with the European Union — is affecting investor sentiment.

“Although we are concerned about the increasing political isolation of Warsaw within the EU, we remain constructive on Polish assets,” said Societe Generale, which is also overweight the lira. “Continued inflows into (Polish bonds), robust economic data, and strong budget execution may further benefit (the) zloty.”

Regional assets which gained after the ECB’s dovish comments yesterday eased back, with the zloty at one-week lows against the euro while the Hungarian forint slipped from eight-month highs. — Reuters pic

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