:quality(85)/cloudfront-us-east-1.images.arcpublishing.com/infobae/3R2LX2Q6DKZ27JRERGMR33MIEI.jpg "The Fed’s Plan for Extended High Interest Rates and its Impact on Emerging Markets: A Detailed Analysis")
2024-04-24 16:44:00
In the first part of 2024, the gains recorded by Argentine bonds and stocks were remarkable. The change in perception regarding Argentina by market agents motivated greater interest from local and international investors, due to the political and economic turnaround personified by the president. Javier Miley and his ultra-liberal proposals.
Back to numbers, that S&P Merval of the Buenos Aires Stock Exchange this year retains dollar profit of more than 20%, while the ADRs of some Argentine companies show increases of close to 80% in “hard” currency, as is the case with banks. In the same sense is Argentine dollar bonds rise 40 percent this year, with country risk falling below 1,200 points, which has not happened since September 2020.
Measured in dollars “calculated with liquidity”, Argentine shares are around the best prices since June 2018, while the exchange bonds (Globales and Bonares), now in the USD 60 range, mark the highest prices since they were listed on the stock exchange following government restructuring.
This winning run, associated more with expectations of change than with the reality of an economy in recession, also contributed, and very strongly, to a bullish tone in foreign markets. In that first trimester of the year, the most important Wall Street indices marked increases of around 10%, with new historic highs. The S&P 500 traded above 5,000 points, while the Dow Jones Industrial Average reached 40,000 points, both unprecedented marks.
In this regard, the context of Wall Street has turned in recent weeks and “downwind” went out for Argentine assets. New York indicators fell to losses close to 4% in April, putting a “cap” on the bullish rally in domestic assets.
A report by Puente stated that “the Federal Reserve (US Fed) meet once more in the coming days, expected to maintain the benchmark interest rate in today’s range of 5.25-5.5 per cent. Looking ahead to the coming months, less monetary flexibility is projected, following the president of the Fed, Jerome Powell, confirm that the path to inflation does not create enough confidence to start with interest rate cuts. This context of higher prices for a longer period of time until the forecast predicts some strength for the US dollar.”
Puente highlighted that “the data of March inflation (in the US) above expectations, market expectations were corrected down once more, by predicting two reductions in interest rates, which are closer to what some members of the monetary policy committee are predicting – although some of them believe that it might happen only on one occasion or even on no occasion. . This delimits a scenario of high interest rates over a longer period – above 4.75% – which will maintain the attractiveness of entering the fixed income segment for investors seeking to secure high nominal yield on quality bonds“.
As the highest yield of Government bond of the United States attract international capital, they are a powerful competition for bonds from emerging countries such as Argentina, which offers higher returns but with greater risk.
“The Fed is cautious because of persistent inflation. Although there are positive signs in the labor market, an upward movement in the yield is expected. The strategy includes maintaining neutrality in durations, with a positive skew in the short-term yield curve, preference for the UK and US, and caution in corporate credit given the narrowness of spreads,” they added from Schroders.
Prolonged high prices in the US are taking away momentum from demand for assets in emerging countries
“Although the international outlook remains favorable for the country, the situation worsened compared to what was expected at the beginning of the year. In particular, the less monetary easing that the Fed expects, as well as the escalation of the conflict in the Middle East, strengthens the dollar and reinforces the downward trend that our majors are suffering. goods export months ago. It will also be necessary to monitor the movement of our trading partners’ currencies, which might put even more pressure on the lag in the real exchange rate. As an example: the Brazilian real weakened around 5% these days and reached a peak of 5.29 reais per dollar on Tuesday the 15th, a value not seen since last March. Therefore, special attention should be paid to challenges that the world can give Argentina for the rest of the year,” analysts from Invecq Financial Consulting.
It is clear that the exchange rate plan, a stronger dollar on the global stage puts pressure on weakening of the currencies of emerging countries, including the Argentine peso, the Brazilian real and the Chinese yuan. “Emerging economies’ currencies continued to weaken over the past month, given the ‘relative strength’ of the dollar. It should be noted that these countries, for the most part, face cycles of monetary policy easing, which can lead to a weakening of exchange rates,” defined Puente.
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