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Emerging-Market rally seen unstoppable as traders turn to Powell

Currency gauge strengthens above 100-day average as rally gathers pace.
Fed Reserve chairman, Jerome Powell. Image: Bloomberg

There’s so much positive momentum in risk assets, it’s difficult to see what could stand in the way of the emerging-market rally, at least in the coming days.

The stronger-than-forecast May US jobs report and weekend agreement by OPEC+ to a one-month extension of its record output cuts may add to the optimism about the prospects for a global economic recovery, underpinning risk assets. JPMorgan Chase & Co’s measure of implied volatility for emerging-market currencies had its biggest weekly drop since 2011. Stocks enjoyed their best week since 2011, while an index of domestic bonds reached its highest point since early March.

“While there are still significant uncertainties over the Covid-19 impact on corporate earnings, investors are encouraged by the reopening of economies that is likely to lead to a rebound in profitability later this year,” said Iyad Abu Hweij, a managing partner at Allied Investment Partners PJSC in Dubai. “Given the uncertainties, it might be an opportune time for investors to re-balance their portfolios to maintain an appropriate mix aligned with new realities.”

While the Federal Reserve is forecast to hold interest rates near zero when policy makers meet Wednesday, investors will be watching for clues on further stimulus in chairman Jerome Powell’s remarks. Technical indicators suggest the prospects for developing-nation assets look promising as the dollar wobbles. MSCI’s gauge of emerging-market currencies broke above its 100-week moving average on Friday, heralding further gains.

Still, the recovery remains fragile. Hours before the Fed meeting, China will probably show that factory deflation deepened and consumer inflation eased further in May. Data released over the weekend signalled that exports are likely to remain sluggish as the risk of an escalation in friction with the US threatens the outlook for its foreign trade.

Some are also on the lookout for the US Treasury’s semi-annual foreign-exchange report to Congress, which is often released in May. There’s a chance the US will label China a currency manipulator again given the friction, ING Groep said in a report on June 3. Vietnam, Taiwan and Thailand may all be given free passes although they’ve exceeded US thresholds.

Asian data

  • China’s May credit data may be released this week. The aggregate financing figures are expected to reflect increasing policy support for the economy. Chinese government bonds have slumped as a new policy to boost credit growth dashes hopes for more monetary easing
  • South Korea will release its unemployment rate Wednesday as the country plans a third extra budget — the largest single supplementary budget ever — to shore up the slumping economy. The won has been among the weakest currencies in the region this year
  • India is expected to announce Friday that consumer inflation resumed its downtrend in May, which would give the Reserve
  • Bank of India some room to ease policy. Sovereign bonds have traded sideways since mid-May as traders await more central bank support in the face of economic headwinds. Bloomberg Intelligence expects the RBI to lower its repo rate by 50 basis points in August.
  • India will also announce industrial production for April on Friday. The gauge is seen falling 50% year-on-year as the world’s largest lockdown damps economic activity.
  • China, India and Taiwan will see an assessment of their employment outlooks on Tuesday

EMEA data

  • Data due Thursday on South Africa’s mining output and manufacturing production in April will provide a measure of the impact of the coronavirus lockdown on Africa’s most-industrialised economy. Manufacturing probably slumped by 58%, according to the median estimate in a Bloomberg survey
  • The rand strengthened for a third week in the five days through Friday, its best streak this year
  • Hungary’s consumer prices probably fell to an annual 2.2% in May, from 2.4% the previous month
  • The forint has been strengthening against the euro in the past three weeks, its longest winning streak since November
  • Russia’s trade surplus likely narrowed to $6 billion in April, from $9.3 billion the previous month, a report may show on Thursday. The ruble has been among the best-performing developing-nation currencies in the past month as oil prices climbed
  • Turkey’s current-account deficit probably narrowed to $4.55 billion in April, from $4.92 billion in March, data may show Friday. The lira is recovering from a record low reached in May

Latin America data

  • Brazilian inflation numbers are expected to come in below target in May, which may support another interest-rate cut when policy makers meet this month, according to Bloomberg Economics
  • Mexico’s inflation data, to be released on Tuesday, will probably flag an increase in May amid supply shocks and higher fuel prices. Investors will also watch April’s industrial production numbers on Thursday for a reading of the pandemic’s impact
  • Peru’s central bank will probably hold its key interest rate at 0.25% on Thursday, while retaining its dovish tone and keeping open the possibility of additional stimulus later, according to Bloomberg Economics
  • Colombia’s retail- sales figures for April, scheduled for Friday release, will be closely watched as the nation lingers in lockdown
  • The Brazilian real, Mexican peso and Colombian peso have been among the top gainers in emerging markets this month
    Argentina’s New Deadline
  • Argentina set Friday as the latest deadline for creditors to accept a $65 billion debt restructuring deal. The South American nation will also probably post declining inflation figures for May on Thursday.

© 2020 Bloomberg

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