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Emerging Markets Gripped by Greed Now Turn to Fed for F...

Business Maverick

Business Maverick

Emerging Markets Gripped by Greed Now Turn to Fed for Fresh Spur

While the structural issues South Africa is facing may limit the potential upside, investors should remember that not all JSE-listed companies are affected to the same extent, says Abax Investments. (Image: Adobestock)
By Bloomberg
25 Jan 2021 0

Traders are likely putting their trust in the Federal Reserve to provide the next spur to an emerging-market rally that may be showing signs of fatigue.

With Friday’s declines delivering a week-ending jolt to the bulls, some of the warning signs took on a more worrying look. The Bloomberg Barclays local-currency bond index registered its first back-to-back weekly drop since June. Bloomberg’s Fear-Greed indicator for the MSCI developing-nation stock gauge — which measures selling strength versus buying strength — climbed to its highest in almost a decade, a sign that gains may have been excessive. And a basket of currencies had its worst week since the end of October.

Which is why an assurance from the Fed on Wednesday that it will keep the stimulus spigot open via an unaltered bond-buying program could be enough to comfort investors concerned about the delays to a global recovery.

Fear/greed indicator for emerging-market stocks hits highest since 2011

“Because of continuing Covid-19 disruption, the recovery in emerging-market growth will, of course, be a stop-start one,” said Hasnain Malik, the Dubai-based head of equity strategy at Tellimer. “But pauses in emerging-market equity performance, particularly in Asia, should be viewed as opportunities.”

World’s Economic Recovery Gets Delayed by Slow Vaccine Rollouts

A slew of economic output data from countries including South Korea, Poland and Mexico this week will give further evidence of the damage from the pandemic. Excluding China, emerging-market activity fell to about 77% below its pre-virus level in the third week of January, according to Bloomberg Economics estimates.

Investor anxiety, as measured by implied volatility for currencies and stocks, jumped on Friday by the most in about two weeks. Just 24 hours earlier, optimism over additional U.S. stimulus under President Joe Biden had helped drive a gauge of developing-nation equities to an unprecedented high.

Tensions between the world’s two largest economies may also be on the radar this week, with the U.S.-China Economic and Security Review Commission due to hold a hearing on Thursday. The commission is mandated by Congress to report annually on the national security implications of the economic relationship between the two countries.

Economic Pulse

  • As the focus shifts away from U.S. politics and more governments impose lockdowns to fight the spread of Covid-19, several countries are set to report fourth-quarter growth data
  • Bloomberg Economics expect South Korea’s gross domestic product data to come in significantly below consensus, arguing that private consumption will be the main drag on growth, as the year-end virus surge and tightened social distancing measures weigh on incomes and spending
    • The won has been emerging Asia’s worst-performing currency so far this year
  • Figures from the Philippines on Thursday are expected to show continued significant year-over-year contraction
    • The data may come in below consensus because of “prolonged movement restrictions and limited fiscal support,” according to Bloomberg Economics. In addition, a spate of strong typhoons in October and November likely added further downward pressure
  • Taiwan’s data will be released on Friday, with economists surveyed by Bloomberg expecting a 3.45% year-over-year rebound for the fourth quarter
    • The numbers will be buoyed by “strong export performance, while private consumption also rebounded, in part thanks to the government’s cash vouchers and tourism subsidies,” according to Barclays
    • The authorities’ battle against local-currency appreciation continues, with a clamp down on grain companies and their banking partners
    • December industrial production numbers are also due on Monday, with the consensus expecting the year-over-year rate to cool
  • Poland’s gross domestic product published on either Wednesday, Thursday or Friday is forecast to have contracted 2.7% in 2020, compared with a 4.5% expansion the year before
  • A preliminary reading of Mexico’s fourth-quarter gross domestic product on Friday will probably show the economy is recovering, while remaining below pre-pandemic levels
    • Mexican President Andres Manuel Lopez Obrador said he’s infected with Covid-19 after the country posted record increases in cases and fatalities from the outbreak in the past week

Central Banks Decide

  • Hungary’s central bank is predicted to leave its benchmark rate unchanged at 0.6% on Tuesday
    • The forint is the best-performing emerging-market currency this year
  • Policy makers in Colombia will probably leave interest rates on hold on Wednesday during their first meeting under new central bank Governor Leonardo Villar
    • Bloomberg Economics expects the decision to be split, as it was in December, with a few policy makers voting for a 25 basis-point cut
  • While Chile’s central bank is expected to keep its key policy rate steady on Wednesday, investors will be watching for any hint on the future path of policy

What to Watch

  • Vietnam’s twice-a-decade National Congress kicks off on Monday. Bloomberg economics expects the leaders to allow more flexibility in the dong’s exchange rate
  • Russian assets may be under pressure after supporters of opposition leader Alexey Navalny held the country’s biggest anti-Kremlin protests since at least 2018
    • The ruble was the worst performer after Brazil’s real on Friday as oil prices declined
  • Turkey will hold exploratory talks with Greece in Istanbul on Monday as the two countries seek to defuse years of conflict over sovereignty and energy rights
  • South Korea’s January consumer confidence is out on Wednesday. The lockdown may have continued to impact sentiment, which slumped in December
    • Note that the average Goldman Sachs lockdown index for the country had risen an average 6.7 points to Jan. 15 from December’s average
    • Industrial production numbers will be released on Friday. Consensus expects continued improvement in seasonally adjusted month-on-month terms, as demand for tech products remains robust
  • The Philippines’ December trade data Wednesday are likely to show a continued deficit and slow recovery in export growth
  • China’s industrial profit growth for December is forecast to show continued rapid expansion; the data is due on Wednesday
    • The figures may have shown the second-biggest increase since July 2018, according to Bloomberg Economics. This would reflect a pickup in production, double-digit growth in exports and narrower producer price deflation. A lower year-earlier base may also benefit the reading
    • Official PMIs are out on Sunday, with consensus expecting both manufacturing and services to cool
    • The Chinese authorities continue to battle yuan appreciation with weaker-than-expected fixings and state-bank buying of dollar-yuan; the yuan remains the strongest-performing Asian currency in 2021 so far
    • Read: Surge in USD/CNY Conversion Rates Augurs Well for Yuan in 2021
  • The Thai manufacturing production index for December is likely to come in close to flat after trade data on Friday surprised with exports rising more-than-expected
    • Current-account numbers are due on Friday, and are likely to show a continued deficit of about $1 billion
  • Malaysia trade data will be released on Friday and are expected to show a near record surplus of about 25 billion ringgit, according to economists surveyed by Bloomberg
  • Russia’s industrial output due Monday is likely to show a further contraction in December from a year earlier
  • South Africa’s trade balance data for December published on Friday are set to show the country’s surplus narrowed
    • The rand is one of the worst-performing currencies this year
  • Data due Friday will probably show that Turkey’s trade deficit narrowed in December
    • Goldman Sachs revised its forecasts for the Turkish currency again, projecting further gains in the near term but warning that “the extent of lira appreciation may be limited”
  • A release of Mexico’s November economic activity index on Monday and retail sales on Tuesday may also add fresh evidence of the country’s economic rebound
  • Readings of Chile’s December retail sales, unemployment and copper production in be released on Friday
  • In Brazil, investors will scrutinize a reading of the bi-weekly consumer-price index on Tuesday for further evidence of a pick-up in inflationary pressures after the central bank adopted a more hawkish tone last week
    • December’s primary budget-balance figures are due a day later; national unemployment data for the same month come on Thursday
    • The real is the worst-performing currency in emerging markets this year

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