EM central banks start to raise rates

• Three emerging market central banks raised interest rates last week, even as their economies have yet to recover from the coronavirus pandemic.  Brazil (+75bp to 2.75%) and Turkey (+200bp to 19%) hiked policy rates by more than forecast on Thursday, while Russia’s central bank increased the Key Rate was by 25bp to 4.50% on Friday against a Bloomberg consensus view of no change.  Rising inflation risks were the main reasons for the rate hikes, against a background of higher US bond yields. The central banks of Brazil and Russia also indicated further rates hikes were likely to follow in the coming months.
• However in Turkey, CBT governor Naci Agbal was replaced with Sahap Kavcioglu, an economist more aligned with President Erdogan’s views on monetary policy, which suggests lower rates are more likely going forward.  In a written statement on Sunday, Governor Kavcioglu said the central bank would continue to use monetary policy tools to deliver a “permanent” decline in inflation, and that the CBRT would stick to the previous schedule for rate-setting meetings. USDTRY weakened to 8.15 in Asian trading (as of this writing), around 13% higher than Friday.   
• The Central Bank of Egypt (CBE) kept its benchmark rates steady last Thursday, the third consecutive hold. This leaves the overnight deposit rate at 8.25%, close to the series low of 8.00%. While the domestic conditions arguably provided room for the bank to enact a rate cut, board members would have had an eye on international developments in bond markets, and ultimately chose to maintain their cautious approach. With Ramadan’s potentially inflationary pressures just ahead, we think the bank will remain on hold at its April meeting also, but we still see room for a rate cut by the CBE at the June or August meeting.
• The BoJ tweaked its monetary policy approach following a three-month review, “clarifying” the band for 10y JGB yield to 25bp either side of zero, up from the assumed 20bp band.   The BoJ will no longer aim to buy JPY 6tn of stock ETFs annually, but will still step in to market if needed. The bank will also switch to the broader Topix index rather than the Nikkei 225.
• Tighter restrictions have been imposed on Paris and other parts of France in response to rising coronavirus infections, including the closure of non-essential shops and the prohibition of inter-regional travel.  Infections in Germany have also increased in recent weeks, and leaders are due to meet Monday to decide on next steps.  Chancellor Merkel has proposed that lockdown measures be extended by another month, to 18 April. Meanwhile, vaccinations using the AstraZeneca vaccine have resumed in most European countries, after the European Medicines Agency reassured on its safety last week.
• Hotel occupancy in Dubai declined to 58.2% in February (2020: 76.9%) in February according to data from STR global.  Revenue per available room declined -33.6% y/y.  However, the data is likely to improve on a y/y comparison in the coming months as the UAE’s borders were closed in March 2020, so the pandemic effect will be in the base going forward.
• The UAE cabinet has approved a new remote working visa that will allow individuals to be resident in the UAE even while working for companies abroad.  Press reports suggest that the new visa could be similar to one introduced by Dubai last year, but issued across the UAE. The cabinet also approved multiple entry tourist visas for all nationalities, and confirmed that the UAE had joined the European Bank for Reconstruction and Development and the New Development Bank.  
• The Dubai Multi Commodities Centre (DMCC) and the Securities and Commodities Authority (SCA) are establishing a framework to license and regulate businesses dealing with cryto assets in the DMCC freezone. The initiative aims to foster growth in the crypto and blockchain industries. 

Today’s Economic Data and Events

09:00 Japan Leading Index

18:00 US Existing Home Sales (Feb) forecast 6.5mn (2.9% m/m)

Fixed income

• The rout in benchmark bond markets continued apace last week despite assurances from the US Federal Reserve that rates would remain anchored at low levels until visible improvements to the US economy became notable and the Bank of Japan committed to stimulus, albeit with more flexibility in its facilities. Yields on the 10yr UST did move up to as high as 1.75% during the course of the week and ended last week up by nearly 10bps. With the Fed reiterating its dovish stance on rates, short term yields showed relatively smaller changes, contributing to a widening of the 2s10s curve to 157bps by the end of the week.
• Emerging market bonds were mixed with yields on Indian 10yr bunds falling almost 4bps along with a 2bps decline in South African yields. Turkey’s central bank hiked one-week repo rates by 200bps, helping initially to bring down 10yr yields. However, the dismissal of central bank governor Naci Agbal following the CBRT meeting and his replacement with a more dovish governor, Sahap Kavcioglu, sets the scene for volatility in Turkish rates at the open.  

FX

• Despite a widespread sell-off in response to the dovish Fed, the dollar still managed to record a weekly gain as the fundamentals of the US economy, and persistently rising UST yields, attract flows to the greenback. The DXY index added 0.26% last week and closed at 91.919 even as the debate remains rampant in markets over whether stimulus will lead to rampant inflation and erode the value of the dollar.
• The EU’s flip-flopping on vaccination programmes isn’t doing the Euro any favours and the single currency fell 0.4% last week, closing out at 1.1904 against the dollar. A break above 1.1945 could represent a snap out of the singe currency’s slump but news flow and data are weighing against it.
• USDJPY initially sank on news that the Bank of Japan would widen its target range for the 10yr JGB. However, most of the yen’s gains were quickly given back as it remains clear that the BoJ will maintain accommodative policy via other avenues. USDJPY did fall over the week but the decline was a modest 0.14% to 108.88.
• Among the major pairs, GBPUSD was the other notable loser against the dollar, slipping by 0.37% to 1.3872 as the Bank of England saw no need to change policy even as gilt yields have shot up. Commodity currency performance was negative last week with the AUD, CAD and NZD all depreciating against the dollar.  

Equities

• Equity markets largely sold off last week despite the Fed’s pushback on rising bond yields, which did little to calm markets. Tech stocks continued to bear the brunt of the recalibration in investment, and the tech-heavy NASDAQ lost -0.8% w/w, with a 0.8% gain on Friday offsetting some earlier losses. The S&P 500 also lost -0.8% w/w while the blue chip Dow Jones saw more modest losses of -0.5%.
• In Europe, the FTSE 100 and the CAC both lost -0.8% w/w, while the DAX gained 0.8%. The composite European STOXX 600 was flat, closing up just 0.1% compared to the previous Friday.
• Markets in Asia were mixed, with losses in Indian indices and the Shanghai Composite, while the Nikkei eked out modest gains, closing up 0.3%.
• The DFM GI finished last week up just over 1% but closed slightly lower yesterday. ADSMI gained 1.8% last week, before slipping -0.2% yesterday.  

Commodities

• Oil prices fell sharply last week with Brent futures giving up 6.8% to settle at USD 64.53/b while WTI was off by 6.4% at USD 61.42/b. Most of the action came Thursday when both contracts saw heavy selling as a strengthening dollar, demand worries and closing out of long positions combined to push back against the strong rally in oil prices so far this year.
• Forward curves followed spot prices lower with the backwardation at the front of the Brent curve shrinking to just USD 0.18/b at the end of the week, compared with more than USD 0.5/b a week earlier while a muted contango has stayed in place at the front of the WTI curve.

Click here for charts and tables