Growth Clouds Send Emerging-Market Investors Seeking Bond Cover

(Bloomberg) -- Worries about the slowing pace of global economic growth are likely to overshadow emerging markets this week even as the U.S. and China edge closer toward a trade deal.

After an index of developing-nation stocks on Friday rounded off its longest-winning streak since January 2018, evidence of sluggish U.S. wage growth and a probable downgrade by the International Monetary Fund of its global economic outlook will keep investors on the back foot. Most emerging-market fund managers and strategists are backing bonds in the current environment, according to a Bloomberg survey conducted March 20-30.

“We remain overweight emerging-market debt, but see much better value in hard-currency credit compared to local-currency markets,” said Paul Greer, a London-based money manager at Fidelity International, whose emerging-market debt fund has outperformed 98 percent of peers this year. “Our biggest concerns remain the outlook for the U.S. dollar, the sluggish performance of volatile currencies such as the Turkish lira, weak emerging-market growth, current stretched market positioning and the potential for disappointment on the U.S.-China trade talks.”

Investors poured money into developing-nation debt funds in 12 out of the past 13 weeks, favoring hard-currency investments and a diversified geographic focus, according to EPFR Global.

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Latin America Rates Review

• Traders may get guidance for the path of Latin American interest rates this week as Brazil and Mexico release March inflation data. Mexican swap rates are already pricing in some easing by the end of this year. Tuesday’s consumer price index for March comes after inflation slowed to within Banxico’s target range in February. The bank releases minutes from its last meeting on Thursday
• In Brazil, investors will eye both a retail sales report on Tuesday and inflation data for March on Wednesday to gauge the economy’s strength. Swap rates haven’t yet priced in a rate cut, although sluggish growth has fueled dovish calls. The major obstacle seems to be on the fiscal side, after the central bank highlighted the need for structural reform to sustain borrowing costs at record lows

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Data and Decisions

• Israel’s central bank will likely hold its benchmark rate steady on Monday, a day before the nation’s general election
• Policy makers in Sri Lanka, Serbia and Peru are also set to keep interest rates unchanged when they meet this week
• A Bloomberg currency index that measures carry-trade returns from eight emerging markets funded by short positions in the dollar had its first weekly gain in three ahead of the release of U.S. inflation data and the Federal Reserve minutes of its March meeting this week
• After being rattled by volatility in Turkish markets recently, investors will be paying close attention to President Recep Tayyip Erdogan’s meeting with Vladimir Putin in Moscow on Monday, as the U.S. ratchets up pressure on Turkey to back off from a purchase of Russian missiles or face economic sanctions
• Inflation figures from China will be due on Thursday, Taiwan on Tuesday and India on Friday
• Malaysia will release its February industrial production data on Thursday and India on Friday

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