Important developments today:
Emerging market assets continue slump
IMF revises forecast for 2010 to 4% growth
U.S. consumer confidence up in January on improved job prospects
Emerging market assets continue slump. Emerging market equities fell for a fifth day on Tuesday, extending their sharpest decline in 11 months, as concerns deepen that China’s actions to curb bank lending will curtail its economic growth. Renewed risk aversion lifted demand for safe-haven assets such as U.S. Treasuries, while riskier assets in general-- and commodity-exporting emerging market assets in particular are falling out of favor. The benchmark MSCI Emerging Markets Index declined 2% on Tuesday, its largest one-day falloff since October. The gauge has slumped 7.2% over the past five trading sessions, the steepest retreat since February 2009. And bearish options on the U.S.-listed iShares MSCI Emerging Markets exchange-traded funds climbed to highest levels since August 2008. Meanwhile, emerging-market bond spreads over comparable U.S. Treasuries widened by 3 basis points (bps) to 299 bps today, according to the JPMorgan EMBI+ Index.
Vietnam issues new international bond. Vietnam raised $1 billion through its newly issued sovereign bonds overnight. But the government had to offer higher yields than lower-rated regional competitors Indonesia and Philippines to lure investors to the country’s second dollar bond since a maiden $750 million sale in 2005. The new issue will mature in 2020 and was priced to yield 6.95%, or 333 basis points above comparable U.S. Treasuries. The issue attracted $2.4 billion in orders, more-than double the amount on offer, with U.S. investors accounting for 56% of the Vietnam notes.
The proceeds from this sale are expected to be used for energy and infrastructure projects that will support growth in an economy suffering a scarcity of foreign exchange, accelerating inflation and a growing trade deficit. Separately, Hungary also plans to issue its first dollar-denominated bond in five years, following road-shows that wrapped up on Monday. EM sovereign borrowers have been quick to tap the international bond markets this year, but the window of opportunity already appears to be closing.
IMF revises forecast for 2010 to 4% growth, up 0.75% from October. In the update to the World Economic Outlook released today, the International Monetary Fund (IMF) revised its estimate for global GDP growth upward by three quarters of a percentage point to 4% for 2010. The revision was supported by a strong bounce-back in global production and trade in the second half of 2009, driven by extraordinary amounts of fiscal stimulus and highly expansionary monetary policy, which brought interest rates in several advanced economies down to unprecedented lows.
The recovery is expected to be sluggish in advanced economies, where output is anticipated to expand 2% in 2010 (reflecting an upward revision of three-quarters of a point), and edge up to 2.5% in 2011. Growth in emerging and developing economies is expected to be more robust, coming in at 6% for 2010 (an upward revision of almost a full percentage point), and to further accelerate to 6.3% by 2011. The IMF notes significant risks to this outlook stemming from premature exits from fiscally supportive policies by governments, and household spending in advanced economies remaining restrained in the face of rising unemployment.
Source: Conference Board
U.S. consumer confidence up in January on improved job prospects.Readings of consumer sentiment by the Conference Board in January yielded better than expected results, as households were in improved spirit on reports of receding job losses, and individual assessments of economic conditions were marked up. The Index of Consumer Confidence moved from a reading of 53.6 in December to 55.9 in January, the highest level since September 2008—just prior to the failure of Lehman Brothers which triggered the worst of the financial crisis. The confidence measure had plumbed all-time lows as recently as February 2009 [see chart]. In other economic news, U.S. home prices, measured by the S&P/Case-Shiller price index increased 0.2% in November (m/m) in the wake of a 0.3% rise in October. Together these developments carried the year-on-year change in the gauge to a decline of 5.3%, the smallest such falloff in two years.
German business sentiment on the rise. The respected IFO gauge of business sentiment increased more-than anticipated in January, reaching an 18-month high reading of 95.8 from 94.6 in December. Prospects for global economic recovery, and an associated pick-up in export performance brightened the views of German business executives. According to Carsten Brezeski of ING Group Brussels, “Today’s report laid to rest some of the concerns that the (German) economy is running out of steam. The recovery is industry led, which should hopefully also support the labor market.”
Among emerging markets:
In Central and Eastern Europe, Poland’s central bank kept its key interest rate unchanged at 3.5%, leaving it at a record low for a seventh consecutive month on expectations that inflation will ease closer to the bank’s target.
In the Middle East and North Africa, the Middle East economy is projected to expand 4.5% in 2010, according to the IMF’ WEO Quarterly Update, an upward revision from the 4.2% projected previously and stronger than the 2.2 percent growth recorded in 2009.
In Sub-Saharan Africa, Sub Saharan Africa’s economy is expected to expand 4.3% percent this year, according to IMF, up from 4.1% previously, as higher commodity prices and government stimulus programs help shield the continent from the global recession. The subcontinent’s economy is projected to grow 5.5 percent in 2011. South Africa’s central bank left its reference interest rate unchanged at 7% for a fourth consecutive meeting. Some members of the Monetary Policy Committee however, were arguing for a rate cut to spur consumer spending. Kenya’s central bank also left its benchmark interest rate unchanged at a record low 7%, as inflation eased and economic growth accelerated following four interest rate cuts last year.