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Wobble or Wipe Out? Emerging Markets Look to Rediscover Balance

People exit the Bank Indonesia headquarters in Jakarta, Indonesia, on Thursday, April 25, 2019. Indonesia’s central bank left its benchmark interest rate unchanged for a fifth month amid a renewed focus on boosting growth in Southeast Asia’s biggest economy. Photographer: Dimas Ardian/Bloomberg

So the emerging-market rally wasn’t so unstoppable after all.

Though nobody was betting that June wouldn’t produce its own trials and turns at some point, the manner of last week’s risk-asset retreat has left investors trying to decipher whether it’s a sign of things to come or just an opportunity to reflect on the strides taken so far.

The MSCI Inc.’s emerging-markets stocks index may have dropped back below the 200-day moving average it broke through on June 8 but the gauge’s 1.6% decline over the five days was less than half of the losses in developed markets. A Bloomberg-Barclays measure of local-currency debt slipped just 0.1 percent after reaching a three-month high, and an MSCI gauge of currencies fell 0.2%.

Emerging-market stock index falls back below 200-day moving average

“We would liken the nascent market rally to a baby just learning to walk,” said Todd Schubert, Singapore-based head of fixed-income research at Bank of Singapore Ltd. “Confident in his or her abilities, but cognizant of the potential dangers lurking around every corner.”

And the dangers remain manifold, from the possibility that a second wave of coronavirus infections could derail the global recovery to an escalation of U.S.-China tensions in the run-up to America’s November presidential election. A warning by the sister of North Korean leader Kim Jong Un over the weekend that the next action will come from the army will likely add to investors’ caution.

Underscoring those anxieties, JPMorgan Chase & Co.’s measure of implied volatility for emerging-market currencies rose for the first time in seven weeks.

Investors will turn to central-bank decisions this week for clues on the next phase, with the average yield on developing-nation currency bonds still close to an all-time low. Policymakers in Indonesia, Russia and Brazil will probably cut interest rates to bolster their economies, eroding their real yields.

More Easing

  • Bank Indonesia will probably cut its policy rate for the third time this year, according to a Bloomberg survey of economists. The authority has held steady its seven-day reverse repurchase rate at 4.5% in the last two meetings
    • Still, there’s a chance BI will stay on hold after risk aversion returned to global markets late last week amid the resurgence of coronavirus cases in the U.S., prompting the central bank to intervene directly in the spot foreign-exchange market
    • The rupiah has rallied from a 22-year low in March
    • “Even as the recent uptick in fund flows and the gain in rupiah have been heartening, the reality is that the need to anchor such gains remain crucial,” wrote Wellian Wiranto, an economist in Singapore at OCBC, which expects BI to keep its policy unchanged
  • As shockwaves from the coronavirus pandemic and the collapse in oil prices continue to ripple through its economy, Russia’s central bank is expected to cut its key policy rate on Friday. The only question is by how much
    • The Bank of Russia saw scope for another 100 bps of easing after April’s half-point reduction. Yet economists surveyed by Bloomberg are split as to whether the central bank will go all the way in June or save some ammunition for July. The median forecast is for a reduction of 75 bps
  • Brazil’s central bank will probably reduce its key interest rate by 75 basis points on Wednesday as the South American nation reels from the economic impact of Covid-19, according to Bloomberg Economics. Investors will also watch April retail sales data on Tuesday for greater insight into the pandemic’s reach
    • The real has been the top performer in emerging markets in the past month. Overseas investors have been trimming short positions in the currency and selling dollars in the local derivatives market since May 14, when the central bank increased its intervention after the real reached an all-time low
  • Taiwan’s monetary authority will likely stand pat as the island has been able to contain the Covid-19 outbreak better than its peers, according to Australia & New Zealand Banking Group Ltd. The central bank lowered its discount rate by 25 basis points to 1.125% at the last quarterly meeting in March. Governor Yang Chin-long said in May there was still room to lower the key rate, but it would take into consideration the actions of other central banks around the world. The Taiwan dollar has been the most stable emerging Asian currency this year
  • Poland’s central bank will probably leave its policy rate unchanged on Tuesday after last month’s surprise cut. The National Bank of Poland reduced its benchmark interest rate to a record-low 0.1% from 0.5% on May 28, following 1 percentage point of cuts in March and April
  • The monetary authority in Chile is expected to hold rates steady on Tuesday, according to economists surveyed by Bloomberg. Santiago is entering its second month in total lockdown while other areas of the country are being added to the quarantine measures as the daily tally of new cases and deaths reach record highs
    • The peso has been the best performing Latin American currency after Brazil’s this month

Argentina, Honduras

  • Argentina moved a deadline for creditors to accept a $65 billion debt restructuring proposal to Friday, June 19 — the fourth extension as the groups edge toward a deal. Economy Minister Martin Guzman said the nation will improve its offer one last time during an interview with Brazilian newspaper Valor Economico. Argentina will also release budget balance figures for May, which could provide clues on the cost of lockdowns to contain the virus
  • Honduras may sell a benchmark-sized dollar bond after holding investor calls last week

Economic Data

  • China will release a slew of data on industrial production and retail sales on Monday, giving insights on how the world’s second-largest economy is recovering from the Covid-19 pandemic
    • Factory output will likely lead the way while retail sales lag. The yuan has stopped testing its 2008 low this month against the dollar as U.S.-China tensions have eased but it has been falling against a basket of trading partners’ currencies, which should help its exports
  • Indonesia and India will both report their May trade figures on Monday. Indonesia may record its third monthly surplus this year on weak import demand and a contraction in exports, while India’s deficit is expected to have contracted further amid subdued oil prices
    • India’s rupee is the biggest loser in the past three months among emerging Asian currencies, while Indonesia’s had the biggest gain
  • The Philippines is due to release last month’s balance of payments on Friday. This will give further evidence whether the peso’s strong showing this year is justified. The BOP surplus widened to more-than-a-year high in April
  • Taiwan will report its export orders in May on Saturday, an advanced indicator of global demand for its shipments especially in electronics. The orders have been recovering since March this year
  • Turkey publishes central government budget data for May on Monday. In April, the government ran one of its widest deficits on record as the coronavirus outbreak paralyzed economic activity, while spending jumped and tax deferrals chipped away at government revenue
    • Rattled by measures that made it more difficult for international investors to bet against the lira, foreign funds have more than halved their holdings of Turkish government bonds this year
  • Uruguay is expected to post first-quarter gross domestic product figures, which will flag the early impact of Covid-19 on the South American economy

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