Central European local investors will hold on to bonds

Significance

The lira’s collapse is fuelling outflows from Turkey’s local currency government debt market, as foreign investors reduce their purchases of emerging market (EM) domestic debt amid a sharp sell-off in bond markets following Donald Trump’s upset victory in the US presidential election. Both Hungary and Poland -- hitherto two of the most resilient EMs -- suffered net outflows last year and are likely to come under further pressure as the ECB starts to scale back, or ‘taper’, its programme of quantitative easing (QE) in April.

Impacts

• The dollar’s rise against a basket of other currencies since the US election will put severe strain on EM assets.
• The surging price of Brent crude is improving the inflation and growth outlook.
• Higher international oil prices will also reduce the scope for further easing of monetary policy in developing and developed economies.