Inflation on the move Gabriele Foa, strategist, Merill Lynch

Dünya Executive - - REPORT -

The inflation rate in Eastern European emerging markets has been on the move in the past six months, and we expect more changes in 2017, affecting real rates and the value of bonds. While the sentiment and global events remain important determinan­ts of performanc­e, inflation will be key to gauge relative value in local markets, given stretched valuations and generally crowded positionin­g. In Turkey, the strong inflation uptick wasn’t followed by a move in inflation breakevens, thus favouring holders of inflation protection. Most likely, inflation will turn down during the next quarter, but breakevens are low even versus our year-end forecast of 9.5% (10.6% is average for 2017). Buying protection on the 10y part of the curve looks best. Moreover, CBT is likely to go back on a dovish stance later in the year, so that inflation pressures will remain high and the inflation levels implied by the long end are arguably too low. Linkers remain illiquid, so rates and bonds are more suitable to trade inflation. (May 12)

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