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Stock futures drift higher ahead of Fed decision


Bloomberg

Emerging Markets Brace for Rate Hikes With Debt at Records

(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 is considering tightening monetary policy sooner than previously signaled, said a person with knowledge of its central bank’s discussions. 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…



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