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Suffering emerging markets look to Powell to calm frayed nerves

A roundup of what the week may hold for emerging markets.
Jerome Powell, chairman of the US Federal Reserve, speaks during a House Financial Services Committee hearing in Washington, DC, US. Picture: Andrew Harrer/Bloomberg

Investors will be hanging on Jerome Powell’s every word this week for clues as to whether the current nervousness gripping emerging markets is justified.

With stocks and currencies across the developing economies on the retreat, the Federal Reserve chairman’s address at the Kansas Fed’s annual Jackson Hole gathering on Friday will be key to gauging whether US policy makers will add to July’s so-called hawkish rate cut. Signs of further easing may help reverse losses that have made some emerging-market assets cheap relative to their likely returns, according to Morgan Stanley.

“Policy action, including from the Fed, and natural cyclical forces should eventually help activity to recover,” strategists including London-based James Lord said in an emailed note dated August 18. “Emerging-market risk assets tend to overshoot and undershoot fair value, with particularly large downside moves in the May-to-October time frame,” they said, adding that more time and lower valuations are needed to win back investors.

With concern growing that the global economy is headed for a recession, emerging-market sovereign bond spreads are on course for the biggest monthly increase since 2012, while the average yield on hard-currency securities rose last week by the most since in a year. Estimated price-to-earnings ratios for stocks are near the lowest level since January.

Local-currency bonds in developing markets are doing better, with a Bloomberg Barclays index showing the higher-risk debt of nations less impacted by turmoil overseas are continuing to benefit from the collapse in global bond yields.

Egypt reigns supreme in that category, with debt yielding an average 16%, the most in the developing world after Argentina, according to the index. Even if the north African nation meets expectations with a 100 basis-point cut to its key interest rate on Thursday, its inflation-adjusted rate will remain among the highest in the world. Indonesia and Zambia will also decide on monetary policy this week.

Playing politics

Markets will have a chance Monday to react to Argentine Economy Minister Nicolas Dujovne’s weekend decision to resign. Dujovne, who led bailout negotiations between Argentina and the International Monetary Fund last year, justified his departure by saying the government needs “significant renewal in the economic area” following Mauricio Macri’s defeat to leftist Alberto Fernandez on Aug. 10. The peso last week weakened the most since 2015.

The trade dispute between the US and China will continue to be a focus for markets after President Donald Trump said he had a call coming soon with his Chinese counterpart, Xi Jinping. Beijing vowed retaliation for the looming US tariffs, which it said was a violation of the accords reached between the two leaders.

Read: Trump ‘not ready’ for China trade deal, dismisses recession fears

South Africa President Cyril Ramaphosa is due to respond to lawmakers’ questions in parliament. He will be asked about the funding he received for his 2017 campaign to win leadership of the ruling African National Congress.

Read: Ramaphosa gets interdict in campaign funding probe

The easing cycle

Egypt will probably reduce its deposit rate to 14.75% on Thursday. Goldman Sachs Group, which also sees 100 basis-point cut, said the central bank has repeatedly stated its view that maintaining ‘a positive’ real rate is appropriate.

Bank Indonesia’s policy meeting on Thursday will be closely watched after three Asian central banks — India, Thailand and the Philippines — cut interest rates earlier this month, with two of them delivering more dovish-than-expected decisions. Economists are almost split on the central bank’s next move
The monetary authority has been intervening to maintain stability in the rupiah, which has weakened 1.6% this month.

Data from Brazil are forecast to show below-target inflation, reinforcing bets of further rate cuts after the economy probably fell into a recession in the second quarter. Swap rates are pricing in 75 basis points of easing through the end of 2019.

Brazil-watchers will also track the government’s reform agenda as lawmakers debate a tax overhaul bill
Investors in Mexico will watch inflation data for clues as to whether Banxico will cut borrowing costs again in September after it reduced rates last week for the first time in five years. An assessment that growth stalled should be confirmed by final gross domestic product data due on Friday.

In South Africa, data Wednesday may show inflation slowed to below the mid-point of the central bank’s target range, providing some room for policy makers to support the economy with a rate cut in coming months. The rand is the worst-performing emerging-market currency this month after the Argentine peso.

The minutes of the latest meeting of Bank of Thailand’s monetary policy committee will be released on Wednesday. They may give further insights into how aggressive the easing cycle will be after authorities unexpectedly lowered the benchmark rate on August 7 for the first time in more than four years

Economic data:

Thailand is set to report on Monday slower growth in the second quarter amid an escalation in the trade dispute between the US and China, a worsening drought and currency gains that have curbed exports and tourism. The median estimate of a Bloomberg survey of economists predict GDP grew 2.3% in the second quarter from a year earlier, compared with 2.8% in the first quarter.

Trade data from Taiwan, South Korea and Thailand due this week will shed more light on how the trade war is hurting key Asian economies

Investors hopeful of policy easing in Poland over the next 12 months will have plenty to chew on. Poland’s statistics office will present July wages and employment data on Tuesday, followed by industrial output and PPI print on Wednesday, and retail sales on Thursday, the day the central bank will release minutes of the last policy meeting

© 2019 Bloomberg L.P.


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