The last few jobs reports in the U.S. (excepting for the most recent one) have been bad news for emerging markets.
Because the Federal Reserve has said its outlook for when it will begin to taper back its quantitative easing program depends on progress in the labour market, better-than-expected results from the report have caused sell-offs in the U.S. Treasury market, sending yields flying higher.
Billions of dollars have flowed into Emerging Market (EM) assets over the past five years as the Fed’s bond-buying programs have kept yields on Treasuries low, sending investors elsewhere in search of yield — but now that yields are rising in the U.S., those inflows to emerging markets have quickly turned to outflows, and EM stocks, bonds, and currencies have all taken big hits as a result.
As a result of the U.S. government shutdown that went into effect Tuesday, the BLS — because it is considered a “non-essential” agency by the White House — won’t be releasing the jobs report at its regularly-scheduled time on Friday morning. The release will be postponed until Congress comes to an agreement on a continuing resolution to fund the government and the BLS, along with other “non-essential” government agencies, is reopened.
Société Générale head of emerging markets strategy Benoît Anne says this amounts to a tactical buying opportunity in EM in a note to clients Wednesday:
No data news is good news. There are basically two ways to look at what is going on in the US currently from a global markets perspective. The first one is negative as essentially, what we have now is fiscal policy uncertainty, on top of monetary policy uncertainty. And all this policy uncertainty may be damaging to global risk sentiment. But the other way to look at it is perhaps more positive, at least tactically. With this US government shutdown, one of the implications for markets is the suspension — or at least a restricted schedule — of US data release.
That to me is a risk-on signal as it removes the short-term risk of watching a stronger US labour report, a release that could potentially create renewed jitters in global markets. Mind you, today’s ADP report was not particularly strong but probably not as market significant as nonfarm payroll would have been. I know it is only a matter of time before the Fed has to normalise its policy, and by the way, that fundamentally is a good thing, but to me, and based on the most recent developments locally, it does not sound like a fast track. Which means that there is a window of opportunity for global emerging markets (GEM) to stage a rebound after a challenging few months. I particularly like EM fixed income where I think there are some interesting pockets of value.
The most recent jobs report released a month ago by the BLS pointed to weaker-than-expected job creation, causing Treasuries to rally, sending yields lower and offering a bit of a reprieve for EM. While a shutdown is only temporary, it could give EM a further short-term boost, if Anne is correct.