Pivotal Week Confronts Emerging Markets at Mercy of U.S. Yields

(Bloomberg) -- That the immediate fate of emerging markets is likely to be determined by the path of the dollar and Treasury yields is barely in dispute.

But what is less clear is which direction the U.S. currency and bond market will take, as investors weigh the competing forces of Covid-19 infections and the prospects of a global economic rebound. Another uncertainty is which developing economies are best-placed to ride the recovery.

This week “will continue to be dominated by rate volatility, issuance and Covid resurgence,” said Abdul Kadir Hussain, the head of fixed-income asset management at Arqaam Capital in Dubai. “If rate volatility declines, supply is constrained and the Covid resurgence in places like India is controlled we can go tighter in spreads. Otherwise, I think we will continue to see weakness in fixed income.”

Last week’s performance provided plenty of pointers. Emerging-market dollar bonds had their best week since December, while local-currency debt rose by the most in two months, according to Bloomberg Barclays indexes. Meantime, developing-nation stocks fell 0.6% amid concerns about rising inflation, while the implied volatility for currencies declined for a second week.

Chinese data will take the spotlight this week as a slew of releases including first-quarter gross domestic product will be watched for clues on the strength of its economic recovery. Inflation data from the U.S. and developing economies from India to Russia will also garner scrutiny as investors seek guidance on the path for monetary policy.

Turkey’s interest-rate decision on Thursday will be in focus as the new central bank governor seeks to win over investors with a commitment to tight monetary policy after his predecessor was fired last month. The Bank of Korea is likely to hold its benchmark rate too.

On Hold

Election Watch

• Peruvians also head to polling stations on Sunday for the first round of their presidential election

  • The Peruvian sol led last week’s currency gains on speculation that pro-market economist Hernando de Soto will secure enough support in Sunday’s presidential election to advance to the June runoff. An Ipsos poll showed that de Soto, a former central bank governor and presidential adviser, gained support to become the second most-favored candidate
  • Peru Vote Key to Bonds After Biggest Sol Rally Since 2008

China Check

• Data on Friday is set to show China’s economy accelerated by a record 18.3% in the first three months of 2021, according to the median estimate of analysts surveyed by Bloomberg

  • Before that, trade figures are forecast to show a continued export boom while industrial production, retail sales and aggregate social financing are also expected to jump

What Else to Watch

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