Business Maverick

Business Maverick

Emerging-Market Traders Caught in Tug of War See Swings Abating

A vibrant Chinese economy could be a rising tide that gets South Africa, and other emerging markets, closer to dry land, says the writer. (Photo: Paul Yeung / Bloomberg via Getty Images)

Low volumes. Low volatility. Low conviction. Welcome to emerging markets, mid-year 2020.

Not that it’s very different for risk assets in general, but there’s a general acceptance that as long as investors weigh the two opposing forces of global stimulus efforts and rising coronavirus infections, the path toward recovery across the world’s developing economies will remain tentative at best.

While implied volatility for emerging-market currencies declined for a third successive week in the five days through Friday, expected swings for stocks fell to the lowest since February. The calm belies the potential turmoil from China’s attempts to tame signs of exuberance in the nation’s equities market or any flare up in tensions between the U.S. and China.

Volume of shares traded in emerging markets dropped this month

“G-7 central-bank policy will remain the key driver for emerging-market asset performance, with the excess liquidity keeping the backdrop relatively stable,” said Simon Quijano-Evans, chief economist at Gemcorp Capital LLP in London. “That is also helping to counter any idiosyncratic negatives out of individual emerging-market countries, especially with regard to how governments are dealing with the Covid-19 onslaught.”

After aggressive interest-rate reductions to shore up their economies against the havoc wrought by the pandemic, central bankers from Russia to South Africa will be considering whether to continue easing this week.

To Cut or Not to Cut?

  • Hungary’s central bank will probably cut its base rate by 15 basis points in a second and final easing move indicated by Deputy Governor Barnabas Virag. Last month’s surprise rate cut left the forint weakening even as policy makers pointed to growing deflationary risks
  • Ukraine’s new central bank governor is set to make his mark at a rate meeting on Thursday after the controversial departure of his predecessor. Investors have signaled the decision will be key to the outlook on Ukrainian assets and whether the authority can maintain its independence from government
    • The yield on the nation’s dollar-denominated Eurobond due 2032 fell 42 basis points last week, but remained higher than before the resignation of Yakiv Smoliy, who’d cited “systematic political pressure”
  • Bank of Russia will probably lower its benchmark interest rate by 25 basis points to 4.25% on Friday
    • The central bank eased monetary policy by a full percentage point in June. While Governor Elvira Nabiullina stressed after the meeting that such big steps won’t become the norm, she said last week that there’s room to cut further as inflation remains well below target
    • The ruble has been the biggest decliner in emerging markets in the past month after Indonesia’s rupiah
  • South Africa’s Monetary Policy Committee may take advantage of the scope to lower its benchmark rate even further
    • After front-loading aggressive cuts that took the repurchase rate to the lowest level since it was introduced in 1998, analysts are divided about the meeting on Thursday. Four out of the 11 economists in a Bloomberg survey forecast a 25-basis-point cut to 3.5%, while three predict a deeper decrease of 50 basis points. Four see rates staying on hold
  • After holding off on cutting rates at last month’s meeting for the first time in a year, Turkey’s central bank will probably stay on hold again at 8.25% on Thursday amid a worsening inflation outlook, according to the median estimate in a Bloomberg survey
    • The central bank delivered 1,575 basis points of easing in nine consecutive meetings starting July 2019, leaving Turkey’s inflation-adjusted rates among the lowest in the world
    • The Turkish lira’s one-week implied volatility decreased for a 10th week in the five days through Friday, its longest losing streak
  • After an unexpected 100 basis-point reduction in the policy rate at its last meeting, Nigeria’s central bank is expected to leave the benchmark unchanged as it tries to avert a recession
  • Angola’s central bank hasn’t cut its policy rate this year and is unlikely to do so on July 24, even as its economy faces a triple shock due to the virus, a steep decline in oil prices coupled and a reduction in crude output to meet its OPEC+ commitment

China’s Bond Market

  • China will likely announce unchanged prime interest rates on Monday, after MLF rates were static again last week
  • The bond market has finally settled down after two and a half months of almost continual yield increases, after overcoming its disappointment with the absence of monetary easing
  • China took a further step in integrating its fragmented bond markets, a move which analysts say could reduce complexity and attract foreign investors
    • Bond traders on the interbank market and stock exchanges can now trade bonds listed on both venues, the People’s Bank of China and the China Securities Regulatory Commission said in a joint statement Sunday

‘Manipulators’ Report

  • The U.S. Treasury could soon publish its long-overdue semi-annual foreign-exchange policy report, and Thailand and Taiwan might be added to the government’s monitoring list, Michael Cahill, an economist at Goldman Sachs Group Inc. in London, wrote in a note July 16
    • Markets might not react too much as this should be widely anticipated, and already explains the reticence of both countries in intervening openly. However, if either country is named a currency manipulator, there’s likely to be significant and renewed appreciation pressure once the U.S. currency resumes its decline

Economic Data

  • Taiwanese export-order data for June due Monday are likely to show continued expansion. On Thursday, June industrial production figures are forecast to register a fifth consecutive year-over-year improvement — highlighting Taiwan’s resilience in the face of the pandemic
    • Underscoring the strength, the Taiwanese dollar has made fresh highs despite the central bank’s apparent increase in resistance
  • South Korea’s 20-day exports for July will be released Tuesday and are forecast to show improvements close to flat in year-on-year terms. On Thursday, the country’s preliminary GDP for the second quarter is due and may show the economy slumped further into contraction
    • The won and and the nation’s bond markets continue to meander
  • On Wednesday, Thailand is likely to post another strong trade surplus for June, which tends to be a seasonally strong month. A depressed manufacturing index is likely to follow any time from Friday onward. Economic weakness and some policy uncertainty, associated with the impending cabinet reshuffle, has made the Thai baht Asia’s worst-performing currency after the Indonesia rupiah this month
  • Malaysia on Wednesday may deliver another negative CPI reading, although there should be a lesser decline due to higher fuel prices and base effects. The bond curve remains under steepening pressure because of the bloated fiscal deficit
  • Brazilian inflation figures through mid-July, to be released on Friday, will probably show an acceleration driven by fuel, transportation and food prices, according to Bloomberg Economics. The real is the worst-performing currency in the world so far this year
  • In Mexico, investors will monitor May retail sales data on Wednesday for signs of the coronavirus’s effects on consumer demand. Economic activity, for which figures are to be released Friday, probably slumped in the same month, according to Bloomberg Economics
  • Argentine budget balance figures for June are expected to be released on Monday. A reading of Argentina’s economic activity index for May on Wednesday will probably show a steep decline from a year earlier as strict social distancing measures remained in place
    • Bonds are trading near 40 cents on the dollar as talks continue to restructure $65 billion in foreign debt
  • Ecuador’s congress was scheduled to debate its choice of a new vice president over the weekend

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