(Bloomberg) -- The rally in emerging-market dollar bonds is awaiting its next catalyst, which may arrive with the US non-farm payrolls data due later Friday.
Traders are anticipating that slower hiring will bolster the case for additional Federal Reserve rate cuts.
A Bloomberg index of hard currency emerging-market sovereign bonds has been flat this week, but Friday’s payrolls report could inject fresh momentum into dollar-denominated debt. Last month, EM sovereign dollar bonds returned 2%, marking five straight months of gains — the longest winning streak since August 2021.
Citi’s economics team expects US payrolls to show just 70,000 new jobs in September, with unemployment rising to 4.3%. Such a report would likely support the Fed’s easing cycle, fueling investor appetite for risk assets.
“A supportive macro backdrop, including lower US rates and a weaker dollar, continues to favor EM hard currency bonds, but the upcoming payrolls data could provide the next leg up,” Citigroup strategists including Alexander Rozhetskin wrote in a note to clients.
Ahead of the payrolls release, MSCI’s EM stock index was up 0.6%, heading for a fourth consecutive weekly gain — the longest streak since May. Currencies were mixed, with the rand and Thai baht — often seen as bellwethers for EM sentiment — showing strength.
Outside of payrolls data, geopolitics remain a worry. Investors are concerned that, should Israel strike critical Iranian assets, the Islamic Republic will lash out and escalate the conflict, dragging in more countries and potentially disrupting global energy shipments. Israel said it bombed more than a dozen Hezbollah targets in Beirut on Thursday.
“The market fear is that there could be supply disruptions coming out of Iran,” said Tai Hui, chief Asia market strategist for JPMorgan Asset Management, on Bloomberg Television. “Demand for oil should remain healthy, but at the same time the risk to the supply side is very much there.”
Elsewhere in EM, the relative strength of Turkey’s lira may be holding back major portfolio inflows even after a landmark shift to orthodox monetary policies that was cheered by investors.
The Philippine central bank is comfortable with the peso’s recent rally as the gains are not as outsized as those seen in most Asian peers, Governor Eli Remolona said.
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