Geopolitic­s and volatility

Dünya Executive - - REPORT - Murat BASBOGA

Rising U.S. Treasury (UST) yields dampened the mood for emerging markets assets, as geopolitic­al issues continued to dominate markets on all fronts. The benchmark 10-year UST offset 3 percent on April 26, while crude oil prices increased 15 percent in the last four weeks due to growing fears the U.S. would re-impose sanctions on Iran. According to a report by the Institute of Internatio­nal Finance, the rise in U.S. bond yields toward 3 percent, along with a stronger dollar, is prompting a sharp downturn in portfolio flows to emerging markets. Since midApril, $5.6 billion has flowed out of emerging market debt and equities. Rising global rates are triggering concerns among emerging market portfolio managers about high debt levels in the emerging world. With more than $900 billion of emerging market bonds due through the end of this year, countries with high external financing like Turkey, Poland, and Argentina remain particular­ly exposed to sudden shifts in global risk sentiment, according to IIF reports. Both the MSCI Emerging Markets equities index and the JPMorgan EMBI Global Diversifie­d bond index have fallen 1.4 percent this month.

However, analysts from Unicredit say that robust economic growth in emerging countries may temper falls. “Rising U.S. real yields, one proxy for real U.S. monetary conditions, which are relevant to EM, should not bite so much if such a rise coincides with EM growth being re-rated higher.” Also, it shouldn’t have a strong negative effect if it coincides with a rise in commodity prices. Neverthele­ss, recent commodity price rises “could be less reliable,” Unicredit says. “We re-iterate our tactical defensive stance towards EMFX for 2Q18. There may be better opportunit­ies to add outright long EMFX exposure in the weeks and months ahead.”

Furthermor­e, nuclear proliferat­ion risk was back on the minds of investors as French President Emmanuel Macron, during a visit to Washington last week, said he expects U.S. President Don- ald Trump to pull out of the 2015 Joint Comprehens­ive Plan of Action (JCPOA), which aims to limit Iran’s nuclear programme and capability. Trump has until May 12 to decide whether to sign the next round of presidenti­al sanction waivers or abandon the deal. In response, the Iranians have threatened to withdraw from the Treaty on the Non-Proliferat­ion of Nuclear Weapons (NPT) if the U.S. pulls out of the JCPOA. Analysts agreed that the end of the Iran deal might trigger a lot of instabilit­y, which will cause a spike in oil prices. Sanctions could easily send oil prices above $80 per barrel from a recent $69, even if the European Union doesn’t back the Trump administra­tion, said Joe McMonigle, senior energy policy analyst at Hedgeye Risk Management.

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