US dollar supported by Friday’s US strong jobs data and Federal Reserve Bank(FED) minutes during this week. Global higher bond yields panic!
Global bond yields have been on the rise (which drive global borrowing costs) and are affected by the speculations about major Central banks’ (Federal Reserve-European Central Bank-Bank of England-Bank of Canada) signal a shift toward tighter monetary policy taper and more rate hikes. As a result of this, Germany bond and US treasury yields are going higher. Moreover, Germany bond yields have climbed to highest level in 17 months. According to the Goldman Sachs strategists, the key is the speed of the move higher in developed market yields. The bank’s projections are for yields to rise only slowly. (A speedy climb could be distress for emerging nations by lifting the cost of dollar-based debt).
An MSCI, index of emerging market currencies, flowed near a seven-week low on Thursday as yields on Treasuries and bonds rose to fresh highs.
Russia’s rouble, Turkey’s lira, South Africa’s rand and Argentine’s peso were down during this week. The Turkish lira, which is the most vulnerable emerging currency to higher US interest rates, touched 6-week lows.
Year to date(YTD) % change in Emerging Markets Country Indices-MSCI ($)
Poland, Greece, South Korea and Turkey have strong performances while Russia is the worst performer compare with other emerging markets. In other words, capital access has tightened in Russia.
Nice read here about additional risk in Emerging Markets
As you can see from the chart below, the higher volatility and deeper drawdowns of stocks attributed to non-US stocks can come from several different reasons: Emerging markets(EM) risks are: currency fluctuations, local economic policies and different forms of state-owned enterprises (additional risk for EM markets)
The risk here is that government stakes in a public company can introduce conflicts of interest between the government and public shareholders. Publicly traded companies like these are prevalent in emerging markets. Examples include Gazprom (Russia), China Construction Bank, and Petrobras (Brazil). Investors that own shares of an emerging-markets fund likely hold these types of companies. Exhibit 2 outlines several emerging-markets ETFs and the number of SOEs in their top 10 holdings.
GOLD AND OIL
Gold and oil are under pressure. Gold(long-term protection) was down as US government bond yields are going up during this week. Quantitative Easing(QE) program in the US created commodities bubble between 2009 and 2014. Therefore, the bond yields with QE are the key for the gold. After 2011, there is a strong negative correlation between gold and US bond yields.
There are two nice graphs about oil price future:
Russia’s deeper production curbs (if Russia is agree) are also the key for oil price.
Reflationary environment again?
Equities expensive, commodities so cheap !
Commodities are getting cheaper and the sector has never been cheaper relative to equities.
Credit Default Swap(CDS) SPREADS
Argentine’s 5 year CDS spreads have blown out as rising mid-term election risks and huge debt. In other words, Argentina’s default risk is rising. On the other hand, Argentina Merval stock index has gained 24% in dollar terms this year.
South Africa’s perceived risk of default is also rising and IMF warned South Africa over economy’s vulnerability to external shocks and funding shortfalls.
Qatar’s negative rating outlook by Fitch, Standard & Poor’s and Moody’s, following the imposition of diplomatic and economic sanctions by a coalition of Arab States have affected the investors’ confidence negatively in Qatar. CDS spreads have widened in Qatar.
These Are the Sanctions Levied on Qatar by Gulf Rivals So Far:
Meanwhile, emerging sovereign bond spreads over Treasuries were at the highest in two weeks. Hong Kong’s CDS 5y have risen as rising global bond yields and a geopolitical tensions in Asia during this week.
On the other side, Germany’s CDS spreads have performed very well in recent months. According to the IMF report, Germany has low unemployment and a strong economy.
Source: Markit CDX credit default swap indexes cover North America and emerging markets. Markit iTraxx credit default swap indexes cover Europe, Asia, Australia and Japan. The indexes are owned, calculated and administered by Markit. For more information visit www.markit.com/cds
Euromoney’s latest Country Risk Survey shows a gradual rebalancing of risk scores this year, as the aftershocks of the global banking and sovereign debt crises wear off, political risks tied to the European electoral cycle fade, and capital access improves for EMs.
Typically, the global picture is varied, with low oil prices, inter-state conflict, and domestic political upheaval among the many factors affecting sovereign borrowers, bank stability, currency volatility and debt-dynamics influencing yields. Elections in Germany and Italy are tail-risk events for Europe, US president Donald Trump’s policies remain a concern, and with Brexit, the Qatar crisis, and weakened economies caused by the commodity prices.