Gone with the flow
This headline may be familiar to avid movie lovers, but let me remind you that this is not a film review from the late 1930s for the U.S. Civil War epic, “Gone With the Wind.” Instead, it’s about markets: the risks ahead and a record flow of funding to emerging markets since July 2016. What are the things that have changed the attitude towards emerging markets? In a nutshell, it’s the bleak picture painted by the U.S. Federal Reserve regarding interest rates and the economy at large. On the plus side, the problems in the U.K. and Europe are on their way to a new plateau.
Recent weaknesses in global trade and manufacturing indicators have heightened concerns for both investors and policymakers about the global risks. Fed Chair Jerome Powell referred to them as “crosscurrents” in his press conference last week. Of late, the three risks referred to most frequently include a significant escalation of trade tensions, a hard or no-deal Brexit and a sharp slowdown in China’s growth. Economists from Deutsche Bank consider the possibility that fairly extreme “tail risk” versions of each of these risks could be realized at some point in the months ahead.
Back to flows. The emerging local markets already began 2019 with strong inflows. Over the past couple of weeks, inflows have continued to gain steam. The size of inflows is the largest since last February. It’s worth noting that while inflows into debt were subdued in previous weeks and mainly concentrated on equities, this has changed over the past week. The size of bond inflows has grown the largest since last April. Looking back into 2018, EM local markets also started the year with strong inflows, followed by persistent outflows between late April and late October. This said, the size of the outflows in mid-2018 was nowhere near those during the temper tantrum in H2-13, or after the US election in late 2016. In January, EM local bonds saw the best start to the year since 2013 and the best monthly perfor- mance since July 2016. According to Deutsche Bank research on EFPR data, the cumulative flows chase the performance of EM local currency government bonds and currencies.
Regarding the Brexit saga, you may expect a busy week ahead, full of events. On Wednesday, British PM Theresa May will update Parliament on any progress made in seeking changes to her deal. Also, the Valentine’s day vote will likely be more important. The government will put forward a neutral motion, which MPs can then add amendments to, similar to last week. Regardless, it’s difficult to say if any modification can get traction before a second vote on PM May’s deal, which is scheduled to take place during the last week of February.