“The observed capital outflow from markets of developing countries accompanied by an increase in yield spreads of Emerging Markets bonds to the yield of US Treasury bonds (US Treasuries) that are traditionally considered “risk-free” asset, and a sort of benchmark to assess the profitability of other assets.
It is worth noting that last week the indicative yield spread of dollar-denominated bonds of Emerging Markets to US Treasuries continued to rise and jumped to its highest level since the beginning of 2017, it is Obvious that investors demand, Emerging Markets risk premium is permanently growing, but its value is still very low by historical standards in comparison with the crisis values (see Fig.).
An avalanche increase in the yield of dollar bonds Emerging Markets crisis in 2008 and 1998 had good reasons at the same time accompanied by a tendency to reduce the yield of US Treasury bonds. In the current situation the yield of dollar bonds Emerging Markets while growing up, only slightly outpacing the growth yield of US Treasuries. The minutes of the last meeting of the Federal reserve indicate that us Central Bank is ready to continue raising rates, which in the future will push the growth of profitability of dollar-denominated bonds.
However, if the trend of rising bond yields on Emerging Markets in the medium term will remain, and the yield of US Treasuries begin to decline, the process of spread widening will get a noticeable boost to growth. At the same time with a certain probability should not be ruled out that in 2018 can occur as the sharp widening of yield spreads as ten and twenty years ago.”
Oleg Steps, the chief of analytical Department IFK “solid”
Currency Emerging Markets stopped falling
The currencies of Emerging Markets in recent days has suspended its weakening against the background of the observed stabilization of the dollar against a basket of six major world currencies: the dollar index showed impressive growth around the second half of April, which has become the longest series of its strengthening over the past year and a half. Rally of the us currency stalled, after the US dollar strengthened to the highest for the last year the level of the currencies of Emerging Markets countries.
Since the beginning of this year, the most significant losses to the U.S. dollar suffered Argentine peso (-25,4%), Turkish Lira (-17,3%) and Brazilian real (negative 11.6%). The Russian ruble this year was in fourth place in terms of the weakening of the currencies of Emerging Markets countries.
The Central banks of Turkey and India whose currencies are included in the top ten most weakened the US dollar since the beginning of the year, this week will have to make responsible decisions on issues of monetary policy. Turkish regulator seems to have managed to temporarily stabilize the Lira after an increase from June 1-week REPO rate to 16.5% from previous 8%. Currently, the cbrt, which operates several interest rates and completes the process of reforming its monetary policy with a view to its simplification. In turn, the Reserve Bank of India on Wednesday this week, most likely, will speak in favor of tightening its monetary policy and could raise the bet for the first time in the last four years to offset inflation risks and to support the national currency.
Australia’s Central Bank left interest rates at 1.5%
Australia’s Central Bank left its key interest rate unchanged at a record low 1.5 percent, after the unemployment rate rose. The regulator’s decision has coincided with expectations of analysts, according to Bloomberg.
The unemployment rate in Australia in April rose to 5.6%. The global picture has also become more uncertain amid falling emerging markets, populism in Europe and the new duties of the United States.
“On financial markets was influenced by political events in the Eurozone, especially in Italy, – said the head of the Central Bank, Philip Lowe. – There are also concerns about international trade policy in the United States and economic developments in several emerging market economies”.
The controller maintains the rate at 1.5% in 2016, the Central Bank has signaled that he is unlikely to tighten policy until unemployment falls to 5%, and inflation is not close to the middle of the target range of 2-3%.
Traders evaluate how slight the chances of a rate hike until mid-2019 on the background of the continuing weak wage growth and consumer prices.
The need to tighten policy eased as the credit crunch cooled real estate markets in Sydney and Melbourne after several years of rapid growth.
The reserve Bank of Australia is also limited to the record high level of household debt, which means that any increase in rates will have a significant impact on consumption.
Meanwhile, the Australian economy in the first quarter probably grew by 2.8% yoy, boosted by gas exports and a slowdown in the decline of investment in the mining industry. Data on changes in GDP will be published on Wednesday.
“Recent data on the Australian economy consistent with the Central Bank’s forecast, according to which GDP growth will accelerate to an average of just over 3% in 2018 and 2019, noted Lowe. – The business conditions are positive, and not investment in mining industry growing. Higher levels of investment in public infrastructure also support the economy. It is expected a stronger growth of exports”.
“One of the continuing sources of uncertainty is the forecast of household consumption, – said the head of the Central Bank. – Household incomes are growing slowly, and the level of debt is high.”
