Shake-up in emerging markets

SOUTH Africa’s bond market weakened by a solitary basis point and the rand traded in a narrow‚ but slightly weaker‚ range as the oil price and projections about US interest rates continued to give investors sweaty palms.

Predictions about the strength of the US economy have combined with a weak Russia to shake most emerging markets.

The rand moved close to levels last seen in the 2008 financial crisis last week when it touched R11.75 to the dollar as the rouble registered 50% losses against the dollar for the year.

“This put the rand under severe pressure‚” Iquad Treasury analyst Tony van Dyk said.

The stakes have now been raised for emerging market central banks to consider raising interest rates.

The Indonesian central bank intervened last week – albeit with limited success – as the rupiah fell to record lows‚ while yesterday Brazil’s government economic team increased its long-term interest rate for the first time in more than a decade.

A bond expert said while South African bonds were only a point weaker and “not much is happening”‚ many markets had been victims of the oil price. We will see a lot of uncertainty‚” he said.

According to Dow Jones Newswires‚ oil prices rose yesterday to extend a rebound that started late last week‚ a trend analysts have attributed to traders closing short positions and looking for end-of-year bargains rather than a change in fundamentals.

It is uncertain whether this will last‚ however.

The price of crude has nearly halved since a peak in June as fears about a mismatch between ample supply and tepid demand engulfed the market.

The fall was worsened by a decision of the Organisation of Petroleum Exporting Countries to keep its output levels unchanged.

“It is natural‚ after such price drops‚ to witness some bargain hunting‚ some testing of technical levels‚ but nothing fundamentally has changed‚” DNB Markets oil analyst Torbjørn Kjus said.

“We saw such a rebound at the end of November and it didn’t last.”

Talk of high rates earlier in the year had given Treasuries a bit of a shock‚ triggering the biggest two-day sell-off all year. But yesterday‚ buyers stepped in again.

“I don’t think the opinion of the entrenched buyers has changed much; they still believe rates will stay low for a long‚ long time‚” Thomas Roth at Mitsubishi UFJ Securities‚ based in the US, said.

The local bond market has not yet been reacting strongly to the lurches in sentiment in the fixed income space in the US.

Local fund buying activity at the long end of the market has largely been dictating direction. But a local bond expert said talk that the US might not even raise interest rates was filtering in to the local market now‚ potentially creating new investment plays. – Evan Pickworth

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