Capital flows in emerging markets hit the higest volume since 2016.

[justify]Global carry-trade operations vehicle started to work with full capacity again after the last year's failure for the first time in 5 years. Investors increase capital flows in emerging markets for six weeks in a row, buying high-yield currencies and securities based on interest rates differentials. The first week of February brought an additional 4 billion dollars on inflows into EM bonds and became the largest volume since June 2016. Moreover, that result was the second largest volume of EM operations on record, according to EPFR Global's survey.

The total volume of EM carry-trade operations reached the level of 29 billion dollars this year, according to the Bank of America's analysts: $3 billion came into the fixed-income market of government debt, while $26 billion were invested in shares and equities.

The most powerful driver was the Federal Reserve's soft position on the monetary policy perspective, according to BKS strategist Vyacheslav Smolyaninov: the US Federal Open Market Committee announced the readiness to put financial conditions tightening on hold and even reduce the balance sheet reduction programme, in terms of which the regulator withdraws additional liquidity by 50 billion dollars on a monthly basis.

The index of EM sovereign and corporative bonds issued by the Bank of America Merrill Lynch showed the best yearly start in the last 18 years: the indicator grew by 2.3% in January after a decline in 2018.

The Russian Federation remains on peripherals of that optimism spike as securities funds oriented exclusively to Russian assets continued noticing the capital outflow five weeks in a row. Nevertheless, the Russian market still gets non-residential capital coming from funds which are buying EM assets together with Russian bonds.

The last week's inflow in securities market doubled up the growth pace - up to 180 million dollars. Foreign investors brought 240 million dollars in Moscow Exchange, together with the equities' purchases, which became the highest level since April last year.

Such a sharp reversal in investors' sentiment could bring additional risks. "Securities had gotten too much money in a too short period, and the rest of investors might start worrying about the growth potential shortly", - Smolyaninov explained.

The carry-trade rush creates a background for further rouble's devaluation in the long-term perspective. The foreign capital comes into the market slowly and gradually, whilst it runs out quickly and simultaneously with the lowest possible risks, crashing the local currency exchange rate and plunging the cost of national assets.[/justify]
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