Aurelia Butler

LONDON (Reuters) – The prospect of U.S. interest rates climbing to levels last seen in the run-up to the global financial crisis has cast a fresh pall over emerging economies that have battled to recover from COVID, grappled with rampant inflation and faced capital flight.Many past emerging market crises were linked to dollar strength and rising U.S. interest rates, forcing developing countries into tighter monetary policy to shore up their own currencies and fend off inflation pressures, pushing up costs of servicing dollar-denominated debt.This time round, there are some differences: Emerging central banks have been leaders rather than laggards in the tightening cycle, with policymakers in many regions kicking off rate hikes as early as summer 2021. Yet with major central banks now joining the inflation battle, markets predict the U.S. Federal Reserve will hike interest rates to 4.6% by March 2023 – a move that will raise the heat, especially on smaller, riskier developing economies. That’s a sharp and swift change from just 12 months ago, when Fed forecasters predicted no rate hikes in 2023.”This year has been a perfect storm,” said Damien Buchet, CIO at Finisterre Capital.”The Fed and ECB (European Central Bank) are behind the curve we need to move towards a tightening of financial conditions.”Some of the world’s poorest nations expect debt service payments to rise to $69 billion by 2024 – the highest level in the current decade, according to a recent report. It has been a tricky year for financial markets as countries grapple with a potential recession and an energy shock in the wake of the war in Ukraine, but some emerging nation assets have taken a disproportionate hit.Stocks from developing nations are down about 28% this year, underperforming major developed benchmarks in Europe and the United States which have fallen around 20%. Returns on both hard-currency and local-currency fixed income are deep in the red, while currencies – bar a few exceptions mainly in Latin America – have also tumbled. CAPITAL FLIGHTAccording to the Institute of International Finance capital flows tracker, emerging market assets suffered a record breaking outflow episode sparked by Russia’s Feb. 24 invasion of Ukraine. Capital outflows from emerging markets ex-China which only ended in August were akin to those during the 2013 taper tantrum, the IIF said in September.”Emerging market fortunes continue to rest quite heavily on what the Fed does,” said Manik Narain, head of emerging markets strategy at UBS. Major emerging market central banks had delivered nearly 6,000 basis points in rate increases in 2022 until end-August in their inflation fight, Reuters calculations show. But tighter monetary policy also dampens economic growth. Actions by the Fed, along with those of other major central banks, have prompted early warnings from international officials and analysts that rising rates for currencies like the dollar and the euro could tighten global financial conditions so much it leads to a global recession.Developing central banks find themselves in different stages of the tightening cycle, said Claudia Calich, head of emerging market debt at M&G Investments. “If you look at the forwards and the implied curves of some countries in Latin America such as Chile and Brazil, those markets are really starting to price rate cuts for the second half of next year,” Calich told Reuters. Central banks in central and eastern Europe still have to deliver a few more rate hikes though the cycle was also coming to an end, Calich added.ALMOST DONE AND DUSTEDOverall, many of the biggest emerging market economies enjoyed better fundamentals with the likes of Brazil, Mexico or South Africa delivering rate hikes, building up reserves and enjoying healthy trade balances due to a commodity price boom. Deeper liquid markets in major emerging economies meant they could focus on raising debt locally. However, there is little let-up on the cards for smaller, riskier emerging markets. A record 14 of these so-called frontier markets who issued international debt see their bonds trade at a premium of over 1,000 basis points over safe-haven U.S. Treasuries. Many others such as Egypt or Kenya are a whisker away from these levels. Such wide bond yield spreads mean these countries are effectively shut out of markets and unable to refinance at this stage. Many – such as Egypt and Ghana – have been knocking at the door of the International Monetary Fund (IMF) to help shore up their funding.Raphael Kassin, head of emerging markets hard currency debt at Itau Asset Management said investors needed some clarity on how long rates would stay high. “If it is temporary, will be ok. The majority of countries don’t have big financial needs this year or next year. What really matters is what happens in the longer term.” More

LONDON (Reuters) – U.S. stock index futures were indicating a higher Wall Street open and sterling bounced from this week’s record lows against the dollar on Tuesday as investors took stock after recent sharp market moves. S&P futures rose 1.25% after Wall Street fell deeper into a bear market in the previous session, benchmark 10-year Treasury yields dipped from Monday’s 12-year high and the dollar eased from 20-year highs on a basket of currencies.Markets are wary about the pace of U.S. rate rises to calm inflation, a concern which has hurt risky assets and boosted the U.S. currency.”U.S. rate expectations have increased fairly significantly,” said Andrew Hardy, investment manager at Momentum Global Investment Management, but he added that “there’s a huge amount of bearishness already priced into markets”.Markets are seeing a 72% probability of a further 75 basis point move at the next Federal Reserve meeting in November.The U.S. Federal Reserve will need to raise interest rates by at least another percentage point this year, Chicago Fed President Charles Evans said on Tuesday, a more aggressive stance than he has previously embraced that underscores the central bank’s hardening resolve to quash too-high inflation.Other central bank speakers due on Tuesday include Fed chair Jerome Powell and ECB president Christine Lagarde.Sterling collapsed to a record low $1.0327 on Monday on concern over the funding of recently-announced UK tax cuts, which come on top of huge energy subsidies.But the pound recovered 4.6% from that low to $1.0806, after the Bank of England said late on Monday it would not hesitate to change interest rates and was monitoring markets “very closely”.Bank of England Chief Economist Huw Pill will speak on a panel at 1300 GMT. The pound has suffered “a build-up in negative sentiment which we believe has room to unwind”, said Chris Teschmacher, multi-asset fund manager at Legal & General Investment Management, adding that the asset manager was taking a “moderate positive view” on sterling versus the euro. LGIM would likely add to its position on any further falls in the pound, as this “would only make support from the government or Bank of England more likely”, Teschmacher added. The yield on five-year gilts rose as much as 100 basis points in two trading days, but fell 29 bps on Tuesday. Spillover from Britain kept other assets on edge.Bond selling in Japan pushed yields up to the Bank of Japan’s ceiling and prompted more unscheduled buying from the central bank in response. The German 10-year bond yield briefly hit a new nearly 11-year high of 2.142% before easing. Ten-year U.S. bond yields dropped 7 bps from the U.S. close after reaching a high on Monday of 3.933%. The MSCI world equity index rose 0.15% after hitting its lowest since Nov 2020 on Monday. European stocks gained 0.8% and Britain’s FTSE was steady.MSCI’s broadest index of Asia shares outside Japan hit a fresh two-year low before gaining 0.35%. Japan’s Nikkei was up 0.5%. The dollar index fell 0.27% to 113.56, after touching 114.58 on Monday, its strongest since May 2002.The euro was up 0.36% at $0.9641 after hitting a 20-year low a day ago.Oil rallied after plunging to nine-month lows in the previous session, helped by supply curbs in the U.S. Gulf of Mexico ahead of Hurricane Ian and by a slight softening in the U.S. dollar.U.S. crude gained 1.5% to $77.84 a barrel. Brent crude rose 1.55% to $85.34 per barrel. Dutch and British gas prices rose on news that the Nord Stream gas pipeline from Russia to Europe had suffered damage, raising concerns over the security of the bloc’s energy infrastructure and making a swift resumption in flows through the pipeline even less likely.Gold, which hit a 2-1/2 year low on Monday, rose 1.2% to $1,640 an ounce. Bitcoin broke above $20,000 for the first time in about a week, as cryptocurrencies bounced, along with other risk-sensitive assets. More

The Category 3 hurricane was about 5 miles south of the city of Pinar Del Rio, with maximum sustained winds of 125 mph, the U.S. National Hurricane Center (NHC) said. Ian is expected to strengthen further on Tuesday after cutting a swath through Cuba’s farm country west of the capital Havana and emerging over the southeastern Gulf of Mexico, reaching Category 4 strength before it approaches the Florida west coast, the NHC said.The Biden administration declared a public health emergency for the state of Florida on Monday, in anticipation of the storm’s arrival, and said it was working with local officials to provide support.Hurricane Ian made landfall in Cuba’s Pinar del Rio province early on Tuesday, prompting officials to cut power to the entire province and evacuate 40,000 people from low-lying coastal areas, according to local media reports.As of 6:30 a.m., regional broadcaster TelePinar reported an eerie calm in the city of around 145,000 people as the eye hovered over the area, but warned of fierce winds to follow.Cuban state-run media reported strongest winds to date from Ian at 130 mph (208 kmh) at San Juan y Martinez, a small town on Cuba’s southwest coast.Pinar del Rio province is a lightly populated region but a top producer of farm crops and tobacco. State-run media said 33,000 tonnes of tobacco from prior harvests had been secured ahead of the storm.Rain and winds buffeted Havana early on Tuesday, but the city, under a tropical storm watch and preparing for a potential storm surge, looked likely to be spared the brunt of Ian’s strongest winds.The hurricane hits Cuba at a time of dire economic crisis. Hours-long blackouts had become every day events across much of Cuba – even before the storm – and shortages of food, medicine and fuel are likely to complicate efforts to recover from Ian. The Miami-based National Hurricane Center warned of a life-threatening storm surge, flash floods and possible mudslides across western Cuba on Tuesday. More

The European Union has sought to be a global standard-setter, proposing in July that companies get a licence and provide customer safeguards to issue and sell digital tokens in the 27-nation bloc.But crypto assets, such as cryptocurrencies like bitcoin, are largely still unregulated globally. French central bank governor Francois Villeroy de Galhau said he hoped the EU regulations would be formally adopted by March of next year, adding that other unnamed “major jurisdictions” were less advanced.”We should be extremely mindful to avoid adopting diverging or contradictory regulations, or regulating too late,” Villeroy told a conference on digital finance in Paris.”To do so would be to create an uneven playing field, risking arbitrage and cherry picking,” he said, adding that “unduly complex” regulations could fall short of protecting clients and preventing money-laundering.The EU has pressed ahead with new crypto-asset regulations, while the United States is still in the process of identifying gaps in its rules. More