The volatility of US policies has prompted fund managers to seek alternatives globally, driving local bonds in emerging market countries to achieve their best first-half performance in 16 years.
The surging demand for fixed-income assets denominated in emerging-market currencies is largely the flip side of waning confidence in the US dollar. The dollar has fallen by nearly 11% this year, partly because of President Trump’s trade war and his tax cuts in the face of a ballooning budget deficit.
This is the worst performance of the US dollar since the 1970s. The dollar has fallen across the board, dropping against 19 of the 23 most traded emerging market currencies, with a decline of at least 10% against 10 of them.
Data compiled by Bloomberg shows that the local currency bond index of emerging markets returned over 12% in the first half of this year, outperforming the hard currency bond index which rose by 5.4% during the same period. The increase in the first half was at least the highest level since 2009.
“I don’t think anyone expected the dollar to depreciate as much as it has,” said Edwin Gutierrez, head of emerging market sovereign debt at Aberdeen Standard Investments. “We thought local currency debt would outperform hard currency debt, but we didn’t expect it to perform so strongly.”
The scale of capital inflows is unprecedented. Bank of America on Wednesday cited EPFR Global data saying that emerging market debt funds have attracted over $21 billion in capital so far this year. These funds have attracted capital inflows every week for the past 11 weeks, with $3.1 billion flowing in during the week ending July 2.
Gabriel Makhlouf, a member of the European Central Bank’s governing council, said that the euro cannot quickly replace the US dollar as a pillar of the world financial system because the countries using the euro still have a long way to go in terms of financial and economic integration.
The governor of the Central Bank of Ireland said that in the long run, the dominance of the US dollar will decline, but currently Europe lacks a single fiscal capacity like that of the US Treasury to provide safe assets.
“Frankly speaking, the economic system of Europe has yet to take shape,” Mahlouf said at an economic conference held in Aix-en-Provence, France.
He added that the appreciation of the euro against the US dollar in recent months was more attributed to investors’ concerns over the rule of law in the United States.
Mahluuf said, “It’s a bit exaggerated to say that the euro will suddenly replace the dollar, because the euro is not yet ready for that.”
However, he agreed with the calls from his colleagues at the European Central Bank that Europe should take advantage of the current uncertain global environment as an opportunity to enhance its own security, remove internal barriers within the single market, and increase joint financing for common goals.
Mahrouf said: “These opportunities can actually enhance the EU’s status, strengthen its sovereignty and autonomy, and must be seized.”
Technical analysis:
Gold: The buy-in we recommended last Thursday after the yellow brush liquidity was very successful. This morning, after sweeping the liquidity above 3300, there are now signs of a rebound. So we should wait for a new momentum signal at 3315/20 before entering the market for a long position; meanwhile, maintain the green low-buy configuration near 3300. For detailed positions, please consult the plugin.
The plugin is updated from 12:00 to 13:00 every trading day. If you want to experience the same plugin as shown in the picture, please contact V: Hana-fgfg and note “666” in the message.
The Nasdaq: With the tariff deadline approaching, market sentiment will affect the upside potential of the Nasdaq. For intraday operations, we still recommend waiting for the liquidity sweep near 22,600 before considering a rebound. For detailed positions, please consult the plugin.
(NASDAQ 15-minute chart)
The plugin is updated from 12:00 to 13:00 every trading day. If you want to experience the same plugin as shown in the chart, please contact V: Hana-fgfg and note “666” in the message.
Crude oil: News about OPEC’s production increase has pushed oil prices down to the 66 level. However, technically, the price is still near the key neckline structure. In terms of operation, it is recommended to continue to focus on the short-term rebound signals after the liquidity is swept at a low level. For detailed positions, please consult the plugin.
(Crude Oil 15-Minute Chart)
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Key economic data and events to focus on today:
16:30 Eurozone July Sentix Investor Confidence Index
17:00 Eurozone May retail sales (month-on-month)
22:00 US Global Supply Chain Pressure Index for June
At an unknown time, Israeli Prime Minister Netanyahu met with US President Trump at the White House.
