Carry-Hunting Traders in Emerging Markets Look Beyond China Data

Bloomberg — Emerging-market traders shrugged off the latest bad data from China on Wednesday and resumed their hunt for carry returns ahead of central-bank meetings that are expected to confirm that global interest rates will remain high.

Currencies offering high nominal interest rates such as Hungary’s forint outperformed in MSCI Inc.’s developing-nation benchmark, which defied a recovery in the dollar to stay in the positive territory. Equity gains were concentrated in semiconductor companies and makers of weight-loss drugs, which rallied on a study showing the drugs can also protect the heart. High-yielding bonds, such as those from Egypt and Ghana, rose the most in the dollar-debt markets.

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While growing evidence of China’s slowdown clouds the outlook for riskier assets, traders also take comfort in the idea that the world’s second-biggest economy appears to be on a different trajectory from most other emerging markets, where inflation continues to pose a threat to many developing nations.

“Rates will clearly be stable or higher over the next several months” in emerging markets, regardless of what the Federal Reserve and European Central Bank do next month, said Richard Segal, an analyst at Ambrosia Capital Ltd. in London. “Investors are comfortable with either outcome.”

US Treasury auctions due Wednesday put pressure on bonds and helped the dollar trim losses, undermining emerging-market gains. Latin American currencies were unferperfoming, especially Mexico’s peso, which hit a day’s low.

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The next key data point for emerging markets is the US consumer-price-index release on Thursday, when investors will seek clues on whether the Federal Reserve can avoid raising borrowing costs again. China’s struggling recovery makes the US trajectory even more crucial for poorer nations and thus any commentary on “soft-landing” possibilities will also be closely watched.

Kenya may hold its benchmark rate at its meeting Wednesday, while India, Mexico and Serbia may do so on Thursday, according to Bloomberg surveys.

Carry can better insulate EM investors from adverse movements in spot foreign exchange, limiting losses during periods of broad dollar strength. Non-deliverable forwards may be an attractive mechanism for capturing cross-border carry, as investors gain exposure to both interest-rate differentials and changes in spot foreign exchange.

What Bloomberg Intelligence Says

Damian Sassower, chief EM credit strategist

The impact on currency markets of the latest China data, which showed the country sliding into deflation, was also muted by China setting a stronger-than-expected fixing for the yuan, signaling that it will continue to support the domestic unit.

In Russia, the ruble weakened for a third day toward 100 per dollar before a report that may show domestic inflation accelerated. The currency is heading for its seventh successive month of losses, the longest streak since January 2015. Zambia’s currency gained as copper prices rebounded.

The uneasy calm that often grips emerging equity markets before a big US data release was also evident on Wednesday, with health-care stocks the bright spot. The subgroup accounted for a fifth of the gains in the MSCI benchmark, with South Korea’s Hanmi Pharm and Hong Kong-listed Innovent Biologics rallying 12% or more. A study of Denmark’s Novo Nordisk A/S’s Wegovy showed a 20% reduction in heart issues compared to subjects getting a placebo.

Looking beyond the economic data this week, investors are growing wary of the potential for defaults and bankruptcies in China’s over-leveraged private sector. A must-read on the subject: Country Garden Default Would Be Worse Than Evergrande, BI Says

Read more at Bloomberg.com