(Bloomberg) — Put aside the inevitable hit that risk assets are taking as a result of President Donald Trump’s sickness. Emerging markets can celebrate a few plus points.
Staring down almost $16 trillion of negative-yielding debt worldwide, investors will continue to be drawn to the higher returns offered by emerging-market assets and the prospect of an economic recovery next year, analysts say. Developing-nation currencies are also benefiting from broad dollar weakness, with the U.S. currency still below its 200-day moving average. Trump’s diagnosis has also made it more likely Congress and the White House will reach a deal on pandemic relief before the November election.
Against that backdrop, the benchmark emerging-market currency gauge climbed 0.5% in the five days through Friday, led by the South African rand and Mexican peso. MSCI Inc.’s gauge of stocks gained 2.1%, its best week since August, and the Bloomberg Barclays index of local-currency bonds added 0.4%. Dollar bonds were steady after a three-week sequence of declines.
“We try and zoom out from the current noise around U.S. politics and the potential for a U.S. fiscal stimulus package,” said Anders Faergemann, a London-based senior money manager at PineBridge Investments, which manages about $104 billion. “The recent market wobble represents an opportunity to reposition for a constructive outlook for emerging markets into 2021.”
Goldman Sachs, UBS, Bank of America, BlackRock: EM Views Summary
Still, last week’s revelation that Trump tested positive for the Covid-19 coronavirus will likely keep risk appetite in check, at least as trading gets underway Monday. The U.S. president has made “substantial progress” but still isn’t “out of the woods,” his physician Sean Conley said on Saturday.
Emerging-market investors may be on their way out amid uncertainty surrounding the U.S. election, the Institute of International Finance warned last week. While investors poured $12.9 billion of net non-resident portfolio flows into emerging-market bonds in September, they withdrew about $10.8 billion from equities, and the divergence between debt and equity flows is rising, according to the Washington-based trade group for financial institutions.
“Our data shows that a big ‘risk-off’ is brewing in emerging markets,” IIF economist Jonathan Fortun wrote from Washington. “We are tracking high-frequency outflows from EM in the final weeks of September almost as big as in the 2013 taper tantrum.”
After last week’s acrimonious U.S. presidential discourse, this week’s vice-presidential debate between Democratic nominee Kamala Harris and Vice President Michael Pence on Wednesday will be in focus as there could be an orderly discussion of issues.
There are also country-specific factors to consider. Argentina’s investors will be keen to see the impact of central bank measures that allow the peso to depreciate faster, while Turkey will unveil September inflation data.
“Both Argentina and Turkey are facing challenging times with declining FX reserves, but the market considers these events idiosyncratic,” Faergemann said. “We don’t expect those concerns to spread to other emerging-market countries.”
Investor anxiety, as measured by implied volatility for developing-nation currencies, eased by the most in three months last week, according to a JPMorgan Chase & Co. index.
Turkey’s inflation rate probably rose to 12.1% in September from a year earlier, from 11.77% the previous month, a report may show MondayThe central bank unexpectedly hiked its one-week repo rate by 200 basis points to 10.25% last month and unwound a slew of trading restrictions on the currencyThat didn’t stop the lira from underperforming almost all of its peers last week as a flare-up in tensions between neighbors Azerbaijan and Armenia increased geopolitical risksThe Argentine peso was also one of the biggest losers in the five days through Friday after the central bank announced a raft of measures to defend its foreign-currency reserves. The central bank had to sell dollars to prop up the peso, limiting its decline to 0.9% on Friday
Poland’s central bank will probably keep its benchmark rate at a record low of 0.1% on Wednesday, even after inflation accelerated in September. Governor Adam Glapinski has pledged to leave borrowing costs near zero as long as the economy needs support
The zloty strengthened 1% against the euro last weekPeru’s monetary authority is expected to keep its key interest rate at 0.25% for a sixth meeting on Wednesday. Bloomberg Economics expects policy makers to reiterate that they will offer more accommodation if it’s needed, but stop short of announcing new measures
In Mexico, traders will parse the minutes of the central bank’s last meeting, to be released on Thursday, for clues on how cautious Banxico will be when it comes to future easing
Consumer prices probably inched higher in September as higher core inflation offset non-core price changes, according to Bloomberg EconomicsSerbia, Uganda and Botswana will also decide on monetary policy on Thursday
U.S. Secretary of State Michael Pompeo is scheduled to visit Seoul Oct. 7-8. South Korea is pushing for the resumption of nuclear talks with President Trump and North Korean leader Kim Jong UnPrior to the Seoul trip, Pompeo will be in Tokyo on Tuesday to attend the Quad group, which is seen as a counter to China’s influence in the Indo-Pacific region. Other attendees are Japanese Foreign Minister Toshimitsu Motegi, Australian Foreign Minister Marise Payne and India’s Subrahmanyam Jaishankar
China’s foreign-exchange reserves for September, due Wednesday, are expected to have remained stable at about $3.17 trillion, according to Citigroup Inc.While a stronger dollar could have a “negative FX valuation effect,” the decline would be offset by a solid current current and bond-market inflows, the U.S. bank saidThe yuan has been resilient this year and the inclusion of Chinese sovereign bonds into the FTSE Russell’s benchmark bond index will likely increase support for the currencyChinese markets will be closed for holidays until ThursdayTaiwan’s trade balance, due on Wednesday, could reflect higher exports to meet demand for tech productsThe Taiwan dollar is among Asia’s best-performing currencies this year amid a rebound in exportsA slew of inflation data will be released this week. Thailand comes on Monday, followed by South Korea and the Philippines on Tuesday, and Taiwan on ThursdayThe South African Reserve Bank will publish its six-monthly Monetary Policy Review on TuesdayThe monetary policy committee kept its key rate at 3.5% in September after 300 basis points of easing and said inflation will remain close to the 4.5% mid-point of its target range in 2021 and 2022The rand outpaced all of its peers last weekChile investors will watch for September trade-balance and copper-export figures on WednesdayA reading of September consumer price inflation on Thursday will probably break the downtrend of the past six months, according to economists surveyed by BloombergThe peso was the best-performing currency in emerging markets during the third quarterBrazilian retail sales data for August, due on Thursday, will probably flag increased consumption amid fiscal stimulus and low ratesOn Friday, investors will watch September inflation figures for an uptick driven by rising food and goods prices. Traders will also be on the lookout for clarity on the government’s fiscal spending plans.
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