EM opportunity knocks — what to make of the recent market volatility

Emerging market debt has tumbled, but the macro story remains compelling

Time to read: 4 min

Following two consecutive years of double-digit returns in 2016 and 2017, emerging market (EM) debt1 has had a rocky ride so far in 2018. However, in the view of Invesco Fixed Income, the proximate cause for the recent volatility has been a tightening in US financial conditions, not a deterioration in overall EM fundamentals. Therefore, we believe this EM correction has created the largest divergence between fundamentals and valuations seen in many years, and offers a compelling opportunity to add exposure to EM in local currency debt.

The US dollar has risen sharply

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Are you prepared for rising interest rates?

Defined maturity bond fund ETFs may provide a compelling option for a rising interest rate environment

Time to read: 3 min

Interest rates continue their upward trend. In March, the US Federal Reserve (Fed) hiked the federal funds rate by 25 basis points to a target range of 1.5% to 1.75%, citing strength in the US labor market, a low unemployment rate and moderate economic growth.1 This was the sixth such rate increase since December 2015, and isn’t likely to be the last. With inflation nearing the Fed’s annual 2% target, members of the Federal Open Market Committee (FOMC) — the Fed’s policy-making arm — anticipate at least two more 0.25% increases in the federal funds rate by year-end.2

What’s in store for the yield curve?

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Currency outlook: US dollar may be pressured as investors seek more promising growth opportunities elsewhere

Invesco Fixed Income shares its views on currencies around the world

Time to read: 3 min

US dollar:

Underweight. The US is in the later stage of its economic cycle relative to the rest of the world, in our view. We expect the Federal Reserve to grow cautious while other central banks continue tightening. The dollar should be pressured weaker as investors look for better growth and return opportunities elsewhere. However, the fundamental picture has been muddied recently, with growth data disappointing relative to expectations — resulting in a mixed performance for the US dollar. We believe this is a short-term correction in market expectations for both US and global growth. We are watching the data closely to be sure that constructive fundamentals are still intact and this is not the start of a downward trend.

Euro:

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Interest rate outlook: Falling US inflation may become a Fed concern by late 2018

Invesco Fixed Income shares its views on rates around the world

Rob WaldnerTime to read: 3 min

US:

Neutral. Inflation trends are showing no signs of a significant pickup, and economic data over the coming months should support a Federal Reserve (Fed) rate hike in June (currently expected by the market). We think slowing inflation will become a concern for the Fed later in the year, especially as the housing component slows. Over the longer term, we believe risk/reward dynamics favor US Treasuries, especially if geopolitical uncertainty begins to increase. However, with the market correction pushing yields higher in April, we remain neutral on US rates in the near term.

Europe:

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Regulatory changes put spotlight on bond pricing, disclosure

New rules require more transparency around corporate, agency and municipal bond markups

Time to read: 3 min

Effective May 14, 2018, new regulations will be adopted aimed at increasing the transparency of bond pricing. The new rules require dealers of corporate, municipal and agency bonds to clearly disclose bond markups and provide retail investors with relevant price comparisons.

Although this initiative was spearheaded by the Municipal Securities Regulatory Board (MSRB) to cover municipal bonds, the Financial Industry Regulatory Authority (FINRA) has been working in tandem with the MSRB on language that covers corporate and agency bonds as well. Ultimately, the two regulatory agencies came up with

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Examining China’s new era of macro policies

Tighter regulation, looser liquidity and fiscal consolidation are likely the new features of China’s macro policies

Time to read: 3 min

China’s macro policies have entered a new phase following the National People’s Congress meeting held in March 2018. Compared to the past few years, we at Invesco Fixed Income think China’s macro policies will feature tighter regulation, looser liquidity and fiscal consolidation. As previously communicated by President Xi Jinping and his administration, China is:

  • Changing its focus from “quantity” to “quality” of economic growth
  • Seeking to reduce leverage, lower financing costs and strengthen the manufacturing sector
  • Seeking to reduce major economic risks, especially those related to the financial sector and local government indebtedness

2018 policy objectives

The central government’s 2018 macro objectives are

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