Emerging-Market Optimism Hit by Fed as Currencies, Debt Sink

An April rout in emerging-market bonds and currencies has some former bulls turning negative on the outlook for the asset class.

Developing-nation sovereign bonds slid by the most in seven months, while a gauge of currencies fell to the lowest since November as fears over higher-for-longer US interest rates and worsening geopolitical tensions sapped risk appetite last month.

While assets have staged a rebound in early May, many money managers are rethinking their optimism after last month’s selloff. Societe General SA sees the risk of stagflation in the US dealing out further punishment to emerging-market currencies and shorter-maturity bonds. Mackay Shields says the strengthening dollar and repricing of the Federal Reserve rate outlook are dashing hopes for further gains this year.

EM outlook questioned after april slump

“This year has disappointed the expectations early on regarding the claim of victory over global inflation,” said Phoenix Kalen, head of emerging-market research at Societe Generale in London. “Inflation has proven to be a much tougher adversary for central banks to tackle, so optimism over the EM rates story for this year has really crashed and burned.”

An MSCI index of developing-nation currencies slipped 0.6% in April, while a Bloomberg gauge of EM dollar bonds sank 2% and one of local-currency debt slid 1.3%. All three gauges had rallied at the end of last year amid optimism the Fed would start cutting interest rates in 2024. Only the MSCI EM currency index has recovered its April losses in the first few days of this month.