Emerging Market Set to Ride Blue Wave of U.S. Stimulus Money By

By Geoffrey Smith

Investing.com — For emerging markets, the new year has carried on much where the old one left off: a combination of loose global monetary policy and expectations of a vigorous rebound in global growth this year are creating the strongest tailwinds for the asset class in a decade.

Pretty much wherever you look, there is a bullish story to tell and, more often than not, it is the huge twin deficits of the U.S. that are ultimately responsible. With President-elect Joe Biden and his incoming administration about to create $1.9 trillion to sustain U.S. demand and Fed Chairman Jerome Powell just as focused on ensuring that financial conditions remain easy, it is hard to see a boat that won’t be lifted by the tide of dollars rushing out of the U.S. this year.

The reflationary policies enacted by Washington have already driven the Chinese up over 5% from where it was a year ago, and that improvement in China’s spending power is sending strong ripples through global markets, as its increased commodity purchases recycle a trade surplus that is back at record levels, for all of Donald Trump’s efforts to cap it over the last four years.

“China is taking advantage of yuan appreciation to buy up stocks of wheat, corn…and probably copper and iron too…at prices that look relatively OK to them,” said Charlie Robertson, an economist with Renaissance Capital via Twitter on Monday.

and , the two metals that are powering the change to electric mobility more than any other, are up 30% and 27% over the last 12 months, respectively. and are also up by 10% in that timeframe – not bad considering it has witnessed the sharpest economic contraction in living memory. Coffee, sugar and cocoa have also all started to perform strongly in the last two months.

“The implication is China’s surge in demand for these products will end when yuan appreciation stops,” says Robertson.

From Poland and Israel to Chile and Sweden, central banks have started intervening to stop their currencies appreciating too far, too fast. Israel’s bought $21 billion last year but couldn’t stop the shekel rising some 10% from the March low. It now intends to buy $30 billion to keep the shekel down this year.

Things are slightly different in Chile, where the central bank’s announcement of a $12 billion reserve accumulation program for this year is a response to the looming challenges of a 2021 calendar full of bond repayments and political risk events, including election in November.

Chile’s Latin American neighbors suffered grievous hits to their domestic economies from the pandemic last year, and with new strains of Covid-19 still raging in some regions, they will remain dependent to a large degree on external demand to recover this year. Robin Brooks, an economist with the Washington-based Institute for International Finance, says this may make the Mexican a better bet this year…