EM Sell-Off Seen Fundamentally Driven

LatAm financing is on standby waiting for the dust to settle on the current EM rout. Merrill Lynch tells clients to watch inflation indicators. “The sell-off appears more fundamentally-rooted than the late February correction. In other words, less sentiment-driven and more macro/valuation-driven,” says the shop. “For now, the retracement has largely been a function of a positive reassessment of global growth conditions (economic activity-related) and the dramatic consequent rise in real risk-free rates. The spotlight, therefore, should very much be on the risk of an inflation flare-up,” it adds. Others are more upbeat. “With G3 bond market and Chinese equity market risk behind us, we believe emerging market assets look attractive at this point, especially currencies and we expect Brazilian markets to rally next week,” says WestLB. Recent history has shown that there are plenty of deep pockets ready to buy on dips. Besides US CPI data later in the week, Merrill also advises scrutinizing Copom minutes from Brazil Thursday to shed more light on the rationale for the recent 50bp cut in the Selic. It expects Chile to remain on hold when the central bank announces a rate decision on Thursday, and Colombia to tighten 25bp to 9% Friday, in line with consensus.