(Bloomberg) — Alarm bells are starting to ring across emerging markets as countries brace for a new era of rising interest rates.After an unprecedented period of rate cuts to prop up economies shattered by Covid-19, Brazil is expected to raise rates this week and Nigeria and South Africa could follow soon, according to Bloomberg Economics. Russia already stopped easing earlier than expected and Indonesia may do the same.Behind the shift: Renewed optimism in the outlook for the world economy amid greater U.S. stimulus. That’s pushing up commodity-price inflation and global bond yields, while weighing on the currencies of developing nations as capital heads elsewhere.The turn in policy is likely to inflict the greatest pain on those economies that are still struggling to recover or whose debt burdens swelled during the pandemic. Moreover, the gains in consumer prices, including food costs, that will prompt the higher rates may exact the greatest toll on the world’s poorest.“The food-price story and the inflation story are important on the issue of inequality, in terms of a shock that has very unequal effects,” said Carmen Reinhart, the chief economist at the World Bank, said in an interview, citing Turkey and Nigeria as countries at risk. “What you may see are a series of rate hikes in emerging markets trying to deal with the effects of the currency slide and trying to limit the upside on inflation.”Investors are on guard. The MSCI Emerging Markets Index of currencies has dropped 0.5% in 2021 after climbing 3.3% last year. The Bloomberg Commodity Index has jumped 10%, with crude oil rebounding to its highest levels in almost two years.Rate increases are an issue for emerging markets because of a surge in pandemic-related borrowing. Total outstanding debt across the developing world rose to 250% of the countries’ combined gross domestic product last year as governments, companies and households globally raised $24 trillion to offset the fallout from the pandemic. The biggest increases were in China, Turkey, South Korea and the United Arab Emirates.What Bloomberg Economics Says…“The tide is turning for emerging-market central banks. Its timing is unfortunate — most emerging markets have yet to fully recover from the pandemic recession.”– Ziad Daoud, chief emerging markets economistClick here for the full reportAnd there’s little chance of borrowing loads easing any time soon. The Organisation for Economic Co-operation and Development and the International Monetary Fund are among those that have warned governments not to remove stimulus too soon. Moody’s Investors Service says it’s a dynamic that’s here to stay.“While asset prices and debt issuers’ market access have largely recovered from the shock, leverage metrics have shifted more permanently,” Colin Ellis, chief credit officer at the ratings company in London, and Anne Van Praagh, fixed-income managing director in New York, wrote in a report last week. “This is particularly evident for sovereigns, some of which have spent unprecedented sums to fight the pandemic and shore up economic activity.”Further complicating the outlook for emerging markets is they have typically been slower to roll out vaccines. Citigroup Inc. reckons such economies won’t form herd immunity until some point between the end of the third quarter of this year and the first half of 2022. Developed economies are seen doing so by the end of 2021.The first to change course will likely be Brazil. Policy makers are forecast to lift the benchmark rate by 50 basis to 2.5% when they meet Wednesday. Turkey’s central bank, which has already embarked on rate increases to shore up the lira and tame inflation, convenes the following day, with a 100 basis-point move in the cards. On Friday, Russia could signal tightening is imminent.Nigeria and Argentina could then raise their rates as soon as the second quarter, according to Bloomberg Economics. Market metrics show expectations are also building for policy tightening in India, South Korea, Malaysia and Thailand.“Given higher global rates and what is likely to be firming core inflation next year, we pull forward our forecasts for monetary policy normalization for most central banks to 2022, from late 2022 or 2023 earlier,” Goldman Sachs Group Inc. analysts wrote in a report Monday. “For RBI, the liquidity tightening this year could morph into a hiking cycle next year given the faster recovery path and high and sticky core inflation.”Some countries may still be in a better position to weather the storm than during the “taper tantrum” of 2013 when bets on cuts in U.S. stimulus triggered capital outflows and sudden gyrations in foreign-exchange markets. In emerging Asia, central banks have built up critical buffers, partly by adding $468 billion to their foreign reserves last year, the most in eight years.Yet higher rates will expose countries, such as Brazil and South Africa, that are ill-positioned to stabilize the debt they’ve run up in the past year, Sergi Lanau and Jonathan Fortun, economists at the Washington-based Institute of International Finance, said in a report last week.“Relative to developed markets, the room low rates afford emerging markets is more limited,” they wrote. “Higher interest rates would reduce fiscal space significantly. Only high-growth Asian emerging markets would be able to run primary deficits and still stabilize debt.”Among those most at risk are markets still heavily dependent on foreign-currency debt, such as Turkey, Kenya and Tunisia, William Jackson, chief emerging markets economist at Capital Economics in London, said in a report. Yet local-currency sovereign bond yields also have risen, hurting Latin American economies most, he said.Other emerging markets could be forced to put off their own fiscal measures following the passage of the $1.9 trillion U.S. stimulus plan, a danger underlined by Nomura Holdings Inc. more than a month ago.“Governments may be tempted to follow Janet Yellen’s clarion call to act big this year on fiscal policy, to continue to run large or even larger fiscal deficits,” Rob Subbaraman, head of global markets research at Nomura in Singapore, wrote in a recent report. “However, this would be a dangerous strategy.”The net interest burden of emerging-market governments is more than three times that of their developed-market counterparts, while emerging markets are both more inflation-prone and dependent on external financing, he said.In addition to South Africa, Nomura highlighted Egypt, Pakistan and India as markets where net interest payments on government debt surged from 2011 to 2020 as a share of output.(Updates with analyst comment in paragraph after Read More box, updates yield data in chart.)For more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2021 Bloomberg L.P.
TSX extends gains as gold prices rise, set to rise for third week
(Reuters) -Canada’s main stock index extended its rise on Friday after hitting a record high a day earlier as gold prices advanced, and was set to gain for a third straight week.
* At 9:40 a.m. ET (13:38 GMT), the Toronto Stock Exchange‘s S&P/TSX composite index was up 24.24 points, or 0.1%, at 19,326.16.
* The Canadian economy is likely to grow at a slower pace in this quarter and the next than previously expected, but tighter lockdown restrictions from another wave of coronavirus were unlikely to derail the economic recovery, a Reuters poll showed.
* The energy sector climbed 0.6% even as U.S. crude prices slipped 0.1% a barrel. Brent crude added 0.1%. [O/R]
* The materials sector, which includes precious and base metals miners and fertilizer companies, added 0.3% as gold futures rose 0.7% to $1,777.9 an ounce. [GOL/] [MET/L]
* The financials sector gained 0.2%. The industrials sector rose 0.1%.
* On the TSX, 117 issues advanced, while 102 issues declined in a 1.15-to-1 ratio favoring gainers, with 14.26 million shares traded.
* The largest percentage gainers on the TSX were Cascades Inc, which jumped 4.2%, and Ballard Power Systems, which rose 2.9%.
* Lghtspeed POS fell 5.6%, the most on the TSX, while the second biggest decliner was goeasy, down 4.9%.
* The most heavily traded shares by volume were Zenabis Global Inc, Bombardier and Royal Bank of Canada.
* The TSX posted 23 new 52-week highs and no new low.
* Across Canadian issues, there were 160 new 52-week highs and 12 new lows, with total volume of 29.68 million shares.
(Reporting by Shashank Nayar in Bengaluru;Editing by Vinay Dwivedi)
Canadian economy likely to slow, but COVID-19 threat to growth low
By Indradip Ghosh and Mumal Rathore
BENGALURU (Reuters) – The Canadian economy is likely to grow at a slower pace this quarter and next than previously expected, but tighter lockdown restrictions from another wave of coronavirus were unlikely to derail the economic recovery, a Reuters poll showed.
Restrictions have been renewed in some provinces as they struggle with a rapid spread of the virus, which has already infected over 1 million people in the country.
After an expected 5.6% growth in the first quarter, the economy was forecast to expand 3.6% this quarter, a sharp downgrade from 6.7% predicted in January.
It was then forecast to grow 6.0% in the third quarter and 5.5% in the fourth, compared with 6.8% and 5.0% forecast previously.
But over three-quarters of economists, or 16 of 21, in response to an additional question said tighter curbs from another COVID-19 wave were unlikely to derail the economic recovery, including one respondent who said “very unlikely”.
“Canada is undergoing a third wave of the virus and while case loads are accelerating, the resiliency the economy has shown in the face of the second wave suggests it can ride out the third wave as well, without considerable economic consequences,” said Sri Thanabalasingam, senior economist at TD Economics.
The April 12-16 poll of 40 economists forecast the commodity-driven economy would grow on average 5.8% this year, the fastest pace of annual expansion in 13 years and the highest prediction since polling began in April 2019.
For next year, the consensus was upgraded to 4.0% from 3.6% growth predicted in January.
What is likely to help is the promise of a fiscal package by Prime Minister Justin Trudeau late last year, which the Canadian government was expected to outline, at least partly, in its first federal budget in two years, on April 19.
When asked what impact that would have, over half, or 11 of 20 economists, said it would boost the economy significantly. Eight respondents said it would have little impact and one said it would have an adverse impact.
“The economic impact of the federal government’s promised C$100 billion fiscal stimulus will depend most importantly on its make up,” said Tony Stillo, director of Canada economics at Oxford Economics.
“A stimulus package that enhances the economy’s potential could provide a material boost to growth without stoking price pressures.”
All but two of 17 economists expected the Bank of Canada to announce a taper to the amount of its weekly bond purchases at its April 21 meeting. The consensus showed interest rates left unchanged at 0.25% until 2023 at least.
“The BoC is set to cut the pace of its asset purchases next week,” noted Stephen Brown, senior Canada economist at Capital Economics.
“While it will also upgrade its GDP forecasts, we expect it to make an offsetting change to its estimate of the economy’s potential, implying the Bank will not materially alter its assessment of when interest rates need to rise.”
(Reporting and polling by Indradip Ghosh and Mumal Rathore; editing by Rahul Karunakar, Larry King)
CANADA STOCKS – TSX rises 0.78% to 19,321.92
* The Toronto Stock Exchange‘s TSX rises 0.78 percent to 19,321.92
* Leading the index were Martinrea International Inc <MRE.TO>, up 7.4%, Fortuna Silver Mines Inc, up 7.1%, and Hudbay Minerals Inc, higher by 6.7%.
* Lagging shares were AcuityAds Holdings Inc, down 6.7%, Ballard Power Systems Inc, down 6.5%, and Northland Power Inc, lower by 6.0%.
* On the TSX 165 issues rose and 60 fell as a 2.8-to-1 ratio favored advancers. There were 18 new highs and no new lows, with total volume of 203.0 million shares.
* The most heavily traded shares by volume were Royal Bank Of Canada, Suncor Energy Inc and Air Canada.
* The TSX’s energy group fell 0.59 points, or 0.5%, while the financials sector climbed 0.86 points, or 0.3%.
* West Texas Intermediate crude futures rose 0.27%, or $0.17, to $63.32 a barrel. Brent crude rose 0.36%, or $0.24, to $66.82 [O/R]
* The TSX is up 10.8% for the year.