On Thursday, a notable decline was observed in the value of emerging-market currencies and stocks, triggered by the revelation of US inflation rates surpassing expectations the previous day, casting a long shadow over the market.
The MSCI index, a measure for currencies in the developing world, saw a reduction of 0.3%, mirroring a similar downturn in the index for emerging-market stocks. The depreciation was widespread among most currencies, with the South Korean currency experiencing the most significant fall.
Despite a brief recovery in losses following the announcement of US Producer Price Index (PPI) data, which came in slightly below forecasts, the financial markets for emerging economies are once again facing downward pressure. This shift is largely attributed to the inflation figures released on Wednesday, prompting a reevaluation of the US interest rate forecasts among traders. Additionally, escalating geopolitical tensions in the Middle East are further dampening the appetite for risk among investors.
According to Win Thin, a senior figure at Brown Brothers Harriman & Co., the markets are still processing the Consumer Price Index (CPI) data. However, the PPI data suggests that inflation pressures are far from subsiding. Thin anticipates that central banks in emerging markets may need to adjust their monetary easing strategies in response to the Federal Reserve's outlook to prevent their currencies from facing excessive devaluation.
Investors are keenly observing the US economic indicators for signs of persistent inflation and robust growth, which would provide insights into the Federal Reserve's forthcoming actions, as noted by Thin.
In the bond market, there's a growing consensus around the possibility of yields reaching 5%, with no anticipation of rate cuts in the near future.
Among its peers, Peru's sol demonstrated resilience, outperforming ahead of a central bank meeting where it's expected that borrowing costs will remain unchanged, marking the second consecutive meeting without a rate adjustment. The decision is set to be announced post the closure of the local market.
In other developments, El Salvador is making a return to the global debt market, proposing an offer that includes a higher interest rate for investors should the government fail to secure credit upgrades or negotiate a deal with the International Monetary Fund. This marks the first bond issuance in nearly four years for the country rated as junk, following a significant rally in El Salvador’s debt.
