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Tuesday, 16 November 2021

US inflation is starting to cause problems for emerging markets

A surge in US inflation is threatening to end the emerging-market USD carry trade: EM carry trades funded in USD have seen the biggest drop-off since the covid market crash in March 2020, tumbling more than 4% over the past two months as US inflation has risen, according to a Bloomberg carry trade index. News last week that US inflation reached a 30-year high in October has increased pressure on the Federal Reserve to tighten policy, an act that would raise costs for investors borrowing greenbacks and push them out of the carry trade. “Sharply higher-than-expected inflation readings in the U.S. and China will play havoc with the narrative that inflation pressures are transitory,” said one EM strategist. “This bodes badly for EM carry trades in the near term as it reduces the relative yield gap.”

The Fed is struggling to control the narrative: In an interview with CNBC yesterday Mohamed El Erian suggested that the Fed’s doubling down on its short-term inflation theory risks undermining US monetary policy. “I think the Fed is losing credibility,” the famed economist and Allianz chief economic advisor said during the Adipec energy expo in Dubai “I’ve argued that it is really important to reestablish a credible voice on inflation and this has massive institutional, political and social implications.”

Egypt is better positioned than most, and thanks to its benchmark rate remaining at 8.25% it still enjoys one of the highest real rates in the world even as inflation has ticked up in recent months. The most recent foreign holdings data (from August) showed that investment in local debt remained at record highs at around USD 33 bn.

But rising US yields could change the calculus: US yields have been climbing since the Fed announced two weeks ago that it would begin tapering its USD 110 bn-a-month bond-buying programme later this month. The bond-market sell-off that began last week continued yesterday, with 10-year yields pushing back above 1.6% as concerns about tightening conditions continued to cause volatility.

“We’re in a very tricky time,” said Ryan Jacob, chief investment officer of Jacob Asset Management. “We’re dealing with kind of a very, very unusual set of crosswinds in the economy that we need to kind of get past.”




-1.4% (YTD: +6%)



Buy 15.66

Sell 15.76



Buy 15.66

Sell 15.76


Interest rates CBE

8.25% deposit

9.25% lending




-0.6% (YTD: +36.2%)




-0.3% (YTD: +63.9%)




+2.7% (YTD: +30.6%)


S&P 500


+0.0% (YTD: +24.7%)


FTSE 100


-0.1% (YTD: +14%)


Brent crude

USD 82.16



Natural gas (Nymex)

USD 5.02




USD 1,867




USD 63,921

-0.6% (as of midnight)


The EGX30 fell 1.4% at yesterday’s close on turnover of EGP 1.02 bn (31% below the 90-day average). Foreign investors were net sellers. The index is up 6.0% YTD.

In the green: Rameda (+5.5%), CIRA (+1.5%) and Speed Medical (+0.8%).

In the red: Fawry (-5.8%), Aspire Capital (-4.3%) and Palm Hills Development (-4.3%).

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