Inflows to EM bonds, equities slow + fretting over US inflation

MARKET WATCH-

The last time US inflation was this high, Mubarak hadn’t completed the first year of his presidency: Consumer prices in the US rose to 6.8% in November from last year — the quickest annual pace since 1982, according to official figures released Friday.

The figures gave more fodder to the bulls, if only because the figures were slightly less bad than they could have been: Analysts attributed gains on the S&P 500 and the Nasdaq, which both rose 1% on the news, to poor inflation data already being priced into the market, and hopes that the figures won’t push the Fed to accelerate the taper or hike interest rates earlier than expected.

Any action from the Fed is going to be “constrained” by a flattening yield curve: The treasuries yield curve — the spread between returns on short- and long-term government bonds — “looks set to be the flattest at the beginning of a Fed tightening cycle in a generation” if the Fed follows expectations to begin raising interest rates around mid-next year, Bloomberg says. The curve could invert — widely considered a sign of impending recession — if we see a series of interest rate hikes from the central bank in 2022, unless inflation proves to be transient and cools next year. The Fed’s Open Market Committee is set to meet this week on Tuesday and Wednesday.

Time for talk: G7 finance ministers will jump on a Zoom call tomorrow to try and find a solution to the surge in inflation around the world, Bloomberg reports, citing people with knowledge of the matter.

But expect more optics than action: “There’s not much governments can do to impose a solution,” said one economist. “The most urgent task for public officials is to show they’re concerned for their citizens’ welfare and at least look like they’re trying to do something.”

Inflows to EM stocks and bonds slowed abruptly in November, as investors fretted over the Omicron variant and the possibility of higher US interest rates come 2022. Foreign flows to EM assets outside of China turned negative at the end of November for the first time since March 2020’s pandemic-induced panic selloff, the Financial Times reports, citing data from the Institute of International Finance (IIF). Slow vaccination rates in EMs and the increasing strength of the greenback as the US eyes raising interest rates next year have seen “the willingness of investors to engage with emerging markets dry up,” the IFF’s chief economist told the paper.

Stuttering bond inflows could mark an end to the pandemic-fuelled EM “debt party,” Bloomberg reports, with strategists predicting record inflows over 2020 and 2021 to stabilize or begin falling in the new year. Some analyst analysts say the boom in EM debt may be cooling off, pointing to signs that the Federal Reserve could tighten policy sooner than expected in response to persistent inflationary pressures, threats to global growth including the emergence of Omicron, and weaker risk sentiment among borrowers. EM debt issuance for this year likely won’t match 2020’s peak of USD 771 bn, which came as developing countries’ governments sought to raise funds for stimulus measures in response to the pandemic.

THE CLOSING BELL-

The EGX30 rose 0.7% at Thursday’s close on turnover of EGP 2.06 bn (31.9% above the 90-day average). Local investors were net sellers. The index is up 6.4% YTD.

In the green: Abu Qir Fertilizers (+20.0%), Heliopolis Housing (+7.5%) and Orascom Development Egypt (+5.1%).

In the red: Egyptian Resorts Company (-1.1%), Cleopatra Hospital (-1.1%) and CIB (-0.8%).