(Bloomberg) — Emerging-market currencies wiped out most of their early gains on Tuesday after fresh data showed US consumer prices picked up in November, reinforcing the Federal Reserve’s case to keep interest rates at elevated levels.
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MSCI Inc.’s emerging-market currencies index closed little changed compared with the prior day after climbing as much as 0.3% earlier in the session. The South African rand — often seen as a proxy for investors’ risk appetite — was among the best performers as it strengthened as much as 1.3% against the US dollar, the most in five days. A counterpart gauge for emerging stocks rose as much as 0.6%.
“It has been CPI-driven,” said Jayati Bharadwaj, a currency strategist at TD Securities, referring to the consumer price index. “Markets were expecting a weaker print and got disappointed, fueling some USD upside.”
Consumer prices ticked up slightly in November after remaining largely unchanged in October. From a year ago, the CPI was up 3.1%.
Tuesday’s figures highlight the resilience of the US labor market and suggest traders “may have again been too early in pricing in so many Fed cuts in 2024, which implies EM has to at least take a breather,” said Charlie Robertson, the London-based head of macro strategy at FIM Partners UK Ltd.
Traders have trimmed their expectations for the Fed to start cutting rates to May of next year, but market participants remain heavily focused on a potential pivot by the US central bank. The Fed is widely expected to leave monetary policy unchanged this week.
Financial assets from developing economies will likely see conflicting drivers until the Fed begins cutting rates, said Win Thin, global head of currency strategy at Brown Brothers Harriman & Co. “The perceived dovish Fed pivot is positive for EM and other risk assets,” he said. “However, I do not think easing will be seen as quickly as markets expect, and they are due for a reality check.”
Read more: US Consumer Prices Pick Up in Bumpy Path Down for Inflation
Meanwhile, Brazil’s annual inflation rate hit the central bank’s target range last month, paving the way for policymakers to deliver a fourth straight rate cut during their meeting on Wednesday. The Brazilian real dipped 0.5% in afternoon trading.
In Asia, shares advanced, driven by a recovery in Hong Kong-listed stocks as traders wait to see whether a meeting of policy makers will result in additional stimulus measures.
The MSCI Asia Pacific Index climbed as much as 0.8% to its highest level this month. Hong Kong-listed Chinese shares also rebounded on Tuesday, with the enterprises gauge and the technology index rising at least 1.4%.
Read more: Top China Hedge Fund Expects 15% Gain in Stocks Next Year
In China, investors took a bullish view on stocks after losses erased $600 billion in shareholder wealth this year. The nation’s mainland equities rose for a third day — their longest streak since October — due to cheap valuations and signs of state buying.
Emerging Credit
In credit markets, bond traders turned the most optimistic in two years on emerging-market sovereign borrowers. A gauge of credit default swaps covering 22 government borrowers narrowed on Tuesday, according to data from IHS Markit, sending the spread to 184 basis points.
Meanwhile, the number of debt-distressed nations whose yields trade at least 1,000 basis points above Treasury rates has shrunk to 14. Egypt is the latest country to exit the club, trading below distressed levels for the first time since March. Seven countries in total have left that group since July 2022.
Sentiment toward emerging-market borrowers is improving as dollar flows accelerate on the back of International Monetary Fund assistance and bilateral investments. Global money-market bets for a more dovish Fed have resulted in lower yields and sparked the best annual returns since 2019. Still, vulnerable emerging markets remain locked out of capital markets due to elevated borrowing costs and tightening money supply.
“As we approach 2024, the conditions for an emerging-market recovery continue to surface,” John Malloy, a money manager at Redwheel, wrote in a note. Redwheel is forecasting a decline in the US dollar, which would help emerging-market currencies. Given that central banks in these markets began raising rates before their counterparts in developed countries, “this leaves room for increased rate cuts,” Malloy said.
Ethiopia’s lone Eurobond also extended gains as traders awaited a meeting later this week that will focus on how to restructure the country’s debt.
The government over the weekend said it would miss an interest payment that had been due on Monday, putting the Horn of Africa nation on the brink of default and ranking it alongside other countries that in recent years have reneged on loan commitments, including Zambia, Ghana and Sri Lanka.
Read more: Ethiopian Eurobond Surges as Investors Await Bondholder Call
–With assistance from Leda Alvim.
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