3 risks weighing on emerging markets6 min read . Updated: 10 Aug 2020, 05:32 AM IST
- Donald Trump’s executive actions announced Saturday will likely provide the initial focus for traders.
- The potential for US-China tensions to escalate further with a planned review of their phase-one trade deal around August15 will probably damp risk appetite
Trump. Trade. Turkey. A trio of risks confronts emerging markets in the coming week following a period in which prices have stuck to the August script, with implied currency volatility increasing in the five days through Friday by the most since the March rout.
Donald Trump’s executive actions announced Saturday will likely provide the initial focus for traders. Though the president’s four orders include continued expanded unemployment benefits and a temporary payroll-tax deferral for some workers, they will probably only provide temporary relief from the effects of the coronavirus pandemic and may jeopardize talks with congressional Democrats over a wider package.
“Until Congress comes to a determination by its own, this is sufficient to keep demand going over the next three to four months," Luciano Jannelli, the head of investment strategy at Abu Dhabi Commercial Bank PJSC, said in an interview with Bloomberg Television.
The trade picture may be more worrisome. The potential for U.S.-China tensions to escalate further with a planned review of their phase-one trade deal around Aug. 15 will probably damp risk appetite. Trump’s move to ban U.S. citizens from doing business with the TikTok and WeChat apps pressured developing-nation stocks, currencies and local-currency bonds on Friday.
“U.S.-China relations remain a wild-card risk, where the scope and extent of escalation remains difficult to handicap," Morgan Stanley strategists, including New York-based Matthew Hornbach, wrote in a report. “An increase in tensions that spill over from the diplomatic relationship to the economic relationship and/or the trade deal could be an important risk-off event for markets."
And then there’s Turkey, where a roller-coaster week saw the lira slide to a record low versus the dollar after authorities stepped back from interventions and relaxed some of the restrictions that tethered the currency for months. Regulators on Friday also announced a tax exemption for foreign-exchange sales by Turkish institutions to foreign financial firms, while Borsa Istanbul introduced an index-linked circuit-breaker system.
“Amid August illiquidity, a discontinuous move in the lira would still reverberate across emerging-market high-yield markets as investors would likely worry about ‘the next domino to fall’ as a result of the Covid crisis," Goldman Sachs Group Inc. strategists, including New York-based Zach Pandl, wrote in a note. They identified the South African rand, Brazilian real, Russian ruble and Mexican peso as the most vulnerable.
The lira weakened the most in emerging markets last week, dropping 4.2%. Stocks as measured by MSCI Inc.’s index tumbled Friday, trimming the week’s advance to 1%. The dollar bonds of developing nations rose on average for a 15th week, the longest streak since 2009. The Bloomberg-Barclays Index of local bonds slipped for the first week in seven.
Mexico, Egypt Decide
- Mexican policy makers will probably cut the key rate for a 10th straight meeting on Thursday to 4.5%, as the economy teeters on the edge of the worst recession in almost a century
- The rate is still among the world’s highest in real terms, which has helped the currency rebound from some losses in recent months
- Peru’s central bank will probably hold rates steady at a record low of 0.25%, also in a Thursday decision. The bank hasn’t ruled out further cuts
- Egyptian policy makers will probably preserve one of the world’s highest inflation-adjusted interest rates when they meet on Thursday. With the central bank keeping borrowing costs on hold since an emergency cut in March, the nation has attracted carry-trade investors again
- Adjusted for prices, Egypt’s rates are the highest along with Malaysia’s among more than 50 major economies tracked by Bloomberg
- Uganda will decide on interest rates on Monday, and Serbia on Thursday
- Brazil will release the minutes of last week’s central bank rate decision on Tuesday. The bank cut the nation’s benchmark Selic rate to an all-time low of 2%, and said it may consider another small cut in the future
Lebanon’s Market Re-Opens
- Beirut’s stock market is due to trade on Monday for the first time since Tuesday’s devastating blast in the capital
- Prime Minister Hassan Diab said he’ll propose early elections Monday after protesters briefly occupied several government buildings to force the removal of a political class they blame for the explosion that killed more than 150 people
- Global leaders, including Trump, are participating in a video conference on aid for Lebanon Sunday
- The nation’s Eurobonds, the subject of a planned debt restructuring, lost 2.4% last week, the biggest loser in emerging markets
- China reports July CPI and PPI on Monday, with the consensus expecting CPI inflation slightly higher. Still, Bloomberg Intelligence forecasts inflation will fall to zero by year-end
- On Friday, industrial production, retail sales and fixed-asset investment are all expected to show further improvement
- At some point during the week, China will also report July money-supply and loans-growth data. Aggregate financing is expected to slow significantly after rapid growth in the first half
- China’s five-year bond yield rose by 11 basis points last week, reflecting the economic recovery
Other Data and Events
- India reports June industrial production on Tuesday. The consensus expects a more than 20% year-over-year contraction. Later in the week, July trade numbers will be released, with the trade balance likely to show continued improvement versus 2019. On Thursday, a report is expected to show July CPI rose at a faster rate. India’s 10-year yield got a bump after Reserve Bank of India’s surprise decision to hold rates steady last week, which reflected such inflation concerns
- Malaysia is scheduled to release its second-quarter gross domestic produce report, which is expected to show a double-digit year-over-year contraction. Current-account figures will also be released on Friday
- The ringgit was Asia’s best-performing currency last week as bonds rallied
- Taiwan releases final second-quarter GDP numbers on Sunday. The Taiwan dollar continues to face appreciation pressure, although it has tended to surrender intraday gains at the close in what might be a sign of the central bank’s desire to prevent appreciation
- Pakistan’s B3 debt rating, with a stable outlook, was confirmed by Moody’s Investors Service over the weekend, concluding the assessor’s review for a downgrade initiated in May
- The nation’s five-year credit-default swaps have fallen by about 115 basis points since the March rout to 580 basis points on Friday
- Turkey publishes data on unemployment on Monday, and on the current-account balance and expected inflation over the next 12 months on Friday.
- Russia’s economy probably shrank by 9.6% year on year in the second quarter amid the nationwide lockdown, data may show Tuesday. The ruble has been one of the worst performers in emerging markets in the past month
- Elsewhere, Poland’s economy is forecast to have contracted 9% in the same period, while Ukraine’s probably shrank 10.5%
- Colombia will probably say on Friday that GDP plunged by more than 10% in the second quarter. The economy is in the deepest slump in more than 100 years
- Colombia will also report economic activity figures on Friday
- Brazil, whose currency was among the world’s worst performers last week, will release June retail sales figures on Wednesday. Sales have dropped for three months
- Argentina will publish inflation figures on Thursday. Its debt was trading below the value established under last week’s restructuring accord, with many investors skeptical the government has negotiated enough fiscal legroom to pull the economy out of a recession
This story has been published from a wire agency feed without modifications to the text. Only the headline has been changed.