Emerging market (EM) stocks and bonds had suffered and developed market equities had flourished, since long term interest rates in the US began their ascent in May 2013, when the US Fed first signaled its intention to taper its support of the US bond market and reduce its injections of cash into the system.
The rand, in company with many other EM currencies took its cue – as it usually does – from the capital flows into and out of EM equities and bonds. The New Year brought no relief for EM markets and currencies, regardless of the direction of US long rates, that turned generally lower in 2014.
That is until last week, when EM markets and currencies ended the week on a stronger note. The key to this improvement was a narrowing spread between US and EM local currency bond yields, as exemplified by the performance of SA government bonds last week. The spread narrowed and the rand and the JSE, in US dollar terms, benefitted – as did other EM equities.
We may hope that this relief for EM markets is more than a straw in the wind and that the now significantly lower EM bond and equity prices have renewed appeal for global fund managers. Any sustained strength in EM currencies will help restrain EM central banks (including the SARB) from raising short term interest rates. The SA-US yield spread will deserve particularly close watching in the days and months ahead.
