Normalisation threatens Emerging Europe’s bond markets

2017 ◽  
Keyword(s):  
Interest Rates ◽  
Federal Reserve ◽  
Emerging Market ◽  
Central Banks ◽  
Capital Inflows ◽  
Bond Markets ◽  
Content Type ◽  
The Us ◽  
Asset Purchases ◽  
Investment Grade

Subject The risks to Emerging Europe’s bond markets from the removal of monetary stimulus. Significance The IMF has warned that the withdrawal of monetary stimulus by the US Federal Reserve (Fed) is likely to reduce capital inflows into emerging market (EM) economies. Emerging Europe is particularly vulnerable, thanks to the additional risks posed by the reduction of asset purchases by the ECB. Corporate bonds are most at risk because of the rapid compression in spreads on sub-investment grade debt, at their lowest levels since the financial crisis. Impacts Hawkish signals from central banks and US tax cuts are taking the benchmark ten-year US Treasury yield to its highest level since mid-March. However, dollar weakness will ease some of the strain on EM currencies and local bonds. With low core euro-area inflation reducing pressure to end QE, the ECB is unlikely to raise interest rates before 2019.

ECB's QE will buoy EM bond markets

2015 ◽  
Keyword(s):  
Interest Rates ◽  
Developing Economies ◽  
Emerging Market ◽  
Investor Sentiment ◽  
Central Banks ◽  
Capital Inflows ◽  
Bond Markets ◽  
Quantitative Easing ◽  
Content Type ◽  
Large Current

Subject Opposite forces are shaping investor sentiment towards EM assets. Significance Investor sentiment towards emerging market (EM) assets is being shaped by the conflicting forces of a strong dollar and the launch of a sovereign quantitative easing (QE) programme by the ECB. While the latter is likely to encourage investment into higher-yielding assets, such as EM debt, the former will keep the currencies of developing economies under strain, particularly those most sensitive to a rise in US interest rates due to heavier reliance on capital inflows to finance large current account deficits, such as Turkey and South Africa. Impacts EM bonds will benefit from ECB-related inflows, while the strength of the dollar will keep local currencies under strain. Higher-yielding EMs will benefit the most from the ECB's bond-buying scheme since they provide the greatest scope for 'carry trades'. The collapse in oil prices is forcing EM central banks to turn increasingly dovish, putting further strain on local currencies.

Foreign holdings of EM debt are a key global risk

2015 ◽  
Keyword(s):  
Interest Rates ◽  
Federal Reserve ◽  
Emerging Market ◽  
Central Banks ◽  
Foreign Investor ◽  
Bond Markets ◽  
Global Risk ◽  
Content Type ◽  
China And India ◽  
China’S Economy

Subject Risks surrounding increased foreign participation in EM bond markets. Significance The rise in the dollar in anticipation that the Federal Reserve (Fed) will start hiking interest rates next month is putting emerging market (EM) currencies under renewed strain. This stress is testing the resilience of EM bond markets, many of which, such as Malaysia and Indonesia, have high levels of foreign investor participation, or, like China and India, are seeking to attract more. Impacts Monetary policy divergence between the Fed and other leading central banks will put further upward pressure on the dollar. A strengthening dollar will extend oil's 6.6% price drop since November 3, undermining sentiment towards EMs. The composition of foreign holdings (institutional money versus flightier capital) will be key to gauging the vulnerability of EM debt. The largest source of vulnerability in EMs will remain the threat of a harder-than-expected landing for China's economy.

Central Europe's slow rate rises will aim at growth

2021 ◽  
Keyword(s):  
Interest Rates ◽  
Federal Reserve ◽  
Slow Rate ◽  
Emerging Market ◽  
Central Banks ◽  
Content Type ◽  
The Us ◽  
Equity Funds ◽  
Us Dollar ◽  
The Eu

Significance The MNB’s first rate rise in a decade responds to headline inflation rising to the highest rate in the EU. The US Federal Reserve (Fed) decision to bring forward raising interest rates to 2023 is putting emerging market (EM) assets under increasing strain and heaping pressure on Central Europe’s central banks to begin tightening. Impacts Capital markets’ ‘hunt for yield’ will bolster EM bond and equity funds despite concerns about the Fed’s withdrawal of stimulus. The vast majority of investors are behaving as if the current surge in inflation will prove transitory. A sharp deterioration in sentiment may follow if price pressures last longer than expected. Brent crude’s rise to its highest level since October 2018, despite the recent rally in the US dollar, will fuel inflationary pressures.

Another rating upgrade is likely for Hungary soon

2016 ◽  
Keyword(s):  
Monetary Policy ◽  
Interest Rates ◽  
Banking Sector ◽  
Credit Rating ◽  
Emerging Market ◽  
Investor Sentiment ◽  
Central Banks ◽  
The Philippines ◽  
Content Type ◽  
Investment Grade

Significance Hungary thereby regains investment-grade status, albeit at the lowest level, from being downgraded to 'junk' because of doubts about the government's policies and the high public debt burden. Hungary's improving creditworthiness, underpinned by its current account surplus and deleveraging in the banking sector, contrasts with the increasing strain on Poland's credit rating. Political risk has become a major driver of investor sentiment towards emerging markets. Impacts Emerging market assets have become more vulnerable as investors reprice US monetary policy. Futures markets are now assigning a 51% probability to another rise in US interest rates at or before the Federal Reserve's July meeting. Central Europe's government bond markets are being supported by the persistently dovish monetary policy stance of its central banks. This contrasts with Latin America, where inflationary pressures are forcing many central banks to raise rates. Brazil, Turkey, Poland and the Philippines are among several countries where political uncertainty is a key determinant of asset prices.

Fiscal policy may deter holding Romanian debt

2017 ◽  
Keyword(s):  
Interest Rates ◽  
Sovereign Debt ◽  
Emerging Market ◽  
Central Banks ◽  
Bond Markets ◽  
Social Democrat ◽  
Content Type ◽  
East European ◽  
Central Eastern Europe ◽  
National Bank

Subject The outlook for Central-East European debt. Significance A flurry of hawkish commentary from the world’s leading central banks, in particular the ECB, which is preparing the ground for a withdrawal of monetary stimulus, has put significant strain on the domestic bond markets of Central-Eastern Europe (CEE). Under particular pressure are Romanian domestic bonds, because of the threat of fiscal slippages under the new Social Democrat (PSD)-led government, which are likely to force the National Bank of Romania (NBR) to hike interest rates more aggressively than its regional peers. Impacts Despite the central-bank-driven sell-off in global markets, negative-yielding bonds still account for one-fifth of global sovereign debt. Persistent concerns about a supply glut are keeping Brent crude below 50 dollars per barrel, with oil prices down by 14% since end-May. Emerging Market stocks are declining under pressure of hawkish rhetoric from central banks, but not Hungarian and Czech equities.

Mixed bond market moves raise policy-tightening risks

2018 ◽  
Keyword(s):  
Federal Reserve ◽  
Yield Curve ◽  
Emerging Market ◽  
Bond Market ◽  
Bond Markets ◽  
Short Term ◽  
Industrial Firms ◽  
Content Type ◽  
The Us ◽  
Equity Funds

Significance Its two-year equivalent, which is more sensitive to US monetary policy, has risen faster, as expectations have increased that the US Federal Reserve (Fed) will raise rates at least twice more this year. The gap between ten- and two-year yields is the narrowest since 2007, suggesting that bond markets expect aggressive short-term policy tightening to dampen growth and inflation in the longer term. Impacts The VIX Index, which anticipates S&P 500 equity volatility, is settling near its three-year average of 15, having touched 50 in February. The dollar has risen by nearly 2% since April 16 despite bearish bets continuing -- suggesting that its slump may have run its course. The ‘search for yield’ will draw investors to emerging market bond and equity funds; 2018 inflows so far are nearing 73 billion dollars. The US yield curve is close to inversion, traditionally signposting recession, but the backdrop of ultra-low rates obscures the outlook. US industrial firms including Caterpillar report solid first-quarter earnings but warn of already teaching a peak, worrying investors.

Pre-poll investor jitters stress the US stock market

2020 ◽  
Keyword(s):  
Stock Market ◽  
Interest Rates ◽  
Euro Area ◽  
Emerging Market ◽  
Capital Inflows ◽  
Content Type ◽  
The Us ◽  
Bond Funds

Significance On September 3, the benchmark S&P 500 index suffered its sharpest fall since early June having gained more than 50% since March 23. Expectations for future volatility in the Nasdaq 100 index, a gauge that includes tech giants Apple and Amazon, this month hit a 16-year high relative to the rest of the stock market and remains elevated. Impacts The Federal Reserve’s move to target average inflation and tolerate periods of higher prices may keep interest rates ‘lower for longer’. The trade-weighted dollar has lost nearly 10% since March, helping the euro to surge and exacerbating euro-area disinflationary pressures. Capital inflows are starting to return to emerging market bond funds, which lost an unprecedented USD120bn earlier this year.

Attention will turn to policy scope to fight recession

2019 ◽  
Keyword(s):  
Federal Reserve ◽  
Equity Markets ◽  
Central Banks ◽  
Equity Market ◽  
Bond Markets ◽  
Content Type ◽  
China Trade ◽  
The Us ◽  
Equity Funds ◽  
Global Equity Markets

Significance The dovish U-turns by the US Federal Reserve (Fed) and the ECB, which were withdrawing monetary stimulus as recently as end-2018, are accentuating concerns that the leading central banks lack the firepower to fight the next recession. Creating confusion, global equity markets are surging but bond markets are growing more pessimistic. Impacts The Chinese equity market is surging as investors anticipate some form of US-China trade deal, but any boost is likely to be temporary. US equities have rebounded this year, but the outflows from US equity funds that began in October will continue and may rise amid anxiety. Chinese growth was slowing even before the tariffs and worries are rising that this, more than trade, will increasingly hit world growth.

US energy high-yield bonds spur default risk

2015 ◽  
Keyword(s):  
Interest Rates ◽  
Default Risk ◽  
Oil Price ◽  
High Yield ◽  
Content Type ◽  
The Past ◽  
The Us ◽  
Low Interest Rates ◽  
Investment Grade ◽  
Energy Companies

Subject Impact of the oil price drop on energy high-yield bonds. Significance The over 50% oil price drop since June 2014 is hitting bonds issued by energy companies, particularly those issued by sub-investment grade corporates. The US high-yield bond market has been growing rapidly over the past five years. The shale boom has generated considerable investment, mainly funded through the issuance of these bonds which benefit from historically low interest rates. As the oil price has plunged, the spread over Treasury yields paid by the average issuer in the energy subsector has more than doubled between July and the December 2014 peak. Impacts Yields currently offered by the energy subsector are not far from pricing in a default scenario. Persistently low oil prices will further darken the outlook for the energy subsector and the high-yield market generally. A possible default cycle in the energy sector could accelerate outflows, overstretching the sector further.

Leading central banks mould investor sentiment

2015 ◽  
Keyword(s):  
Central Bank ◽  
Federal Reserve ◽  
Developing Economies ◽  
Investor Sentiment ◽  
Oil Prices ◽  
Central Banks ◽  
Euro Crisis ◽  
Content Type ◽  
The Us ◽  
Country Specific

Significance In the worst start to a year for US equities since 2008, the benchmark S&P 500 index fell 0.7% during the week ending January 10. December's employment report showed US non-farm payrolls rising by a robust 252,000, but average hourly earnings declined, accentuating deflationary fears. The dollar continued to strengthen against the euro on concerns about a possible euro crisis over Greece and the introduction of sovereign QE by the ECB. With the US Federal Reserve preparing to raise rates, investor sentiment remains fragile. Impacts The tug-of-war between central bank largesse and country-specific, geopolitical and economic risks will become more intense. Markets will focus on renewed fears of 'Grexit' and on concerns about German opposition to an ECB sovereign QE programme. The relentless oil prices slide, exacerbated by the dollar's strength, will put further strain on EM assets. The ruble is likely to weaken further, increasing the scope for contagion to other developing economies.

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