A stronger USD could spell trouble for emerging market bonds

Investors are warning that a strong USD under the approaching Trump administration could lead to weaker returns in emerging market bonds — a line of thought that has prompted investors to pull some USD 5 bn from funds investing in USD- and local currency-denominated EM bonds during the first half of November, the Financial Times reports, citing data from JPMorgan.

Investors are continuing to redirect their attention toward the greenback, Wall Street stocks, and the so-called “Trump trades,” as analysts predict incoming tax cuts and tariffs to fuel inflation — bumping the USD and Treasury yields higher. Ten-year treasury yields have risen from 4.29 to 4.39 per cent since Trump’s election win, while the USD is up against its peers

US tariffs could cause additional pressures on emerging markets’ local currencies due to lower demand for their exports, which could lessen returns on local currency bonds, investors and analysts warn, according to the salmon-colored paper. “All of this is going to be negative for emerging markets,” GAM EM debt manager Paul McNamara told the publication.

But a stronger USD under Trump is far from guaranteed, as the Trump administration's plans for “fiscal policy, monetary policy, trade policy and exchange rate outcomes are incompatible with each other,” argues Quincy Institute senior research fellow Karthik Sankaran. Over time, the economic policies of the incoming government could weaken the USD, but this may be too late for EMs to dodge forecasts of exchange rate pressures, Sankaran adds.

MARKETS THIS MORNING-

Asian markets are kicking off the day in early trading in the green, led by Korea’s Kospi at 1.5%, Japan’s Nikkei at 1.4%, along with Hong Kong’s Hang Seng and the mainland’s Shanghai index both at 0.3%.

THE CLOSING BELL-

The EGX30 fell 0.8% at yesterday’s close on turnover of EGP 2.4 bn (43.2% below the 90-day average). Local investors were the sole net buyers. The index is up 22.1% YTD.

In the green: B Investments Holding (+2.6%), Elsewedy Electric (+1.1%), and Faisal Islamic Bank -USD (+1.0%).

In the red: Ezz Steel (-2.5%), Palm Hills Development (-2.3%), and Alexandria Containers and Cargo Handling (-2.2%).

CORPORATE ACTIONS-

Juhayna will merge four of its subsidiaries — Elmasreya for Dairy Products, Eldawleya Modern Food Industries, Egyptian Food Industries, and Al Marwa Food Industries — into the parent company after its board greenlit the move, according to an EGX disclosure (pdf). The decision will be presented to the company’s extraordinary general assembly for approval.