Global markets were fairly quiet this week, with emerging-market asset prices remaining basically unchanged despite the high volatility observed in oil prices, according to a recent research by Barclays Capital.
The price of oil traded well above expectations, with Bloomberg citing speculation about an explosion in facilities in Saudi Arabia as a possible driver, and its value remains highly sensitive to geopolitical developments and risk. As such, investors should remain vigilant.
The past week was dominated by two major developments: Greece announced the general terms of the private sector initiative, and results of the higher-than-expected second round of loan infusions by the ECB were announced.
The infusion didn’t exceed expectations significantly, however, and high bank participation helped remove the stigma effect associated with using the facility.
In addition to these events, Fed Chairman Bernanke acknowledged persistent downside risks to the economic outlook.
Although the probability of a third round of easing remains subdued, Barclays Capital believes the existing monetary stimulus will remain in place and overall, expects yields in developed markets to remain low and support emerging-market asset prices.
Carry trades will be well supported, and the medium-term effect of the EBC’s loans, due to the additional liquidity in the system, will have a positive effect on asset prices in coming months, with prices having already recovered 70% of the terrain lost during the risk-off period of 2011.
Overall, with the surplus of money flowing into emerging markets, Barclays Capital foresees emerging markets currencies trend-appreciating at a more orderly pace. In addition, emerging-market credit has further room to outperform.
In regard to Eastern Europe, Middle East and Asia, the group’s favoured recommendations are generally bullish, with the region underperforming and high oil prices weakening domestic spending.
Asia’s two largest economies, China and India, are still weak and will likely ease monetary policy further in coming months, while smaller and more open economies could be turning the corner sooner.
Data in China, in particular, continues to suggest a soft landing, but acceleration in activity in Q1 remains unlikely, with Barclays Capital maintaining its 2012 GDP forecast of 8.1%.
February PMI reports indicated a third monthly rise in the country’s PMI to 51, from 50.5 in January. The February year-over-year trade growth, given the holiday effect and more working days this year, is also expected to rebound, with an expected growth rate of 13% for exports and 6% for imports.
Negative results, including a rise in commodity inventories and a sharp slowdown in steel production, continue to weigh on market sentiment however.
The National People’s Congress, China’s legislative body, will convene this coming Monday, March 5, and the 2012 budget will be approved.
Barclays Capital expects officials to approve cautious macroeconomic policy stance, with key policy priorities to expand domestic demand and stabilize investment.
Inflation has surprised on the downside in Indonesia and Thailand. In Korea, inflation has softened a trend that Barclays Capital believes will improve sentiment on risky Asia assets, but lead to steeper rates curves.