Dollar keeps Citi, Morgan Stanley wary of emerging markets

[DUBAI] Emerging market investors reeling from last month's losses head into the first full week of April bracing for more pain driven by higher US Treasury yields and a stronger dollar.

On Friday, stronger-than-expected US jobs data prompted traders to price in an earlier start to Federal Reserve rate increases.

That's fueling concern that the higher returns offered for risk-free investments in the world's largest economy could drive even more money away from emerging markets. Demand for developing-nation assets waned in late March.

Flows to equity funds fell to less than a third of the levels seen in February and bond funds ended the first quarter with more outflows, according to data compiled by EPFR Global.

Morgan Stanley is staying bearish on emerging-market currencies, saying the slow pace of vaccine rollouts in many developing economies is threatening to ensure growth in developing economies will lag behind the US Meantime, Citigroup expects higher US yields and a resilient dollar to put further pressure on the asset class in the coming months.

"This quarter can be big for the dollar and not necessarily amazing for emerging markets," said Luis Costa, Citigroup's London-based head of CEEMEA strategy.

"We don't believe the US curve is pretty much done adjusting. Between now and June/July, we could see a further leg higher here in yields."

Developing-nation currencies and bonds posted their first quarterly decline in a year in the three months ending March 31, while the dollar approached its strongest level since November.

Stocks slid for the first time since September, paring their gains for the quarter.

Investors will turn their attention this week to inflation data across emerging markets as they seek clues on the path for monetary policy after Turkey, Russia and Brazil raised borrowing costs last month.

BLOOMBERG