Litmus Test Awaits Emerging-Market Stocks After Seven-Week Rally

(Bloomberg) -- Emerging markets may have their work cut out sustaining one of their strongest final quarters in more than a decade.

Prospects for a U.S. stimulus windfall, a successful roll-out of Covid-19 vaccine programs, a commodity-price boom and even a possible Brexit trade deal were enough to keep the rally on course last week. Indexes of stocks, currencies and bonds registered their seventh successive weekly advance, taking the gain on the MSCI Inc. equity gauge since the end of September to more than 17% on Friday.

But therein lies a warning. On the two occasions in the past five years when stocks have clocked up such a string of weekly gains, the rally has sputtered. What’s more, as of last week, the gauge was at 15 times the projected 12-month earnings of its members, hovering at the 98th percentile of its valuation range of the past decade. And its 15-day relative strength index has been close to or above overbought levels for more than two weeks.

Investors are likely to avoid additional risk and book their profits this time of year, “which could lead to a sharp correction across emerging markets following their recent impressive gains,” according to Piotr Matys, a strategist at Rabobank in London. Still, “the bullish arguments in favor of emerging markets performing well in 2021 remain valid,” he said.

Read: Bearish Bets Lurk Beneath Emerging-Market Veneer of Confidence

Which is to say emerging markets aren’t likely headed for the buffers yet. The $18 trillion of negative-yielding debt swilling around financial markets will do little to curb the relative allure of higher-yielding debt across the developing world, while the dollar’s weakening trend will likely continue to underpin currencies. That, in turn, may make the servicing of foreign debt a little easier for nations that have collectively sold an unprecedented $730 billion in dollar and euro bonds this year.

Still, as if to underscore the risks that individual emerging-market nations routinely generate, Turkey’s central bank is due to hold a key meeting Dec. 24 at which policy makers, in an effort to shore up the lira, are forecast to raise interest rates for a second successive time. Thailand and Egypt are also due to hold policy meetings.

Central Banks in Focus

• The Bank of Thailand will probably hold interest rates on Wednesday in its final policy meeting this year
  • Focus will be on possible baht measures as the central bank may announce more steps to cool the currency’s rally, according to Bloomberg Economics
  • The baht climbed to the strongest level since January after Thailand was placed on the U.S. Treasury department’s watch list for currency manipulation
• Turkey’s central bank is forecast to hike interest rates at its meeting
  • “A surprising spike in November inflation would justify additional tightening,” according to Bloomberg Economics
  • The lira is the second-worst performing emerging-market currency this year
  • Read more: Lira Traders, Burnt Eight Times, Hope 2021 Will Be Different
• Egypt’s regulator will likely hold rates on Thursday in its last policy meeting of the year
• Investors will monitor Colombia’s central bank meeting minutes on Monday for details of the monetary authority’s split decision to hold its benchmark borrowing rate at a record low Friday
• Chilean policy makers will also release their meeting minutes on Wednesday after leaving the key interest rate untouched and fine-tuning quantitative easing plans earlier this month

Vaccine Progress

• China has kickstarted an effort to inoculate 50 million people ahead of the Lunar New Year
  • China said it has already administered more than 1 million coronavirus vaccines since July
• Chile approved emergency use of the Pfizer Inc.-BioNTech SE vaccine, and Mexico said it expects to start administering doses this week
• Qatar will receive its first Covid-19 vaccine shipment on Monday. Meanwhile, 300,000 people registered to take the jab in Saudi Arabia
• Turkey plans to start Covid-19 vaccinations using the Chinese-made Sinovac Biotech Ltd. shots as early as next month

Asian Trade Recovery

• Taiwan will announce Monday its November figures for export orders, a key barometer for the global tech supply chain
  • Citigroup Inc., which predicts an advance of 10%, said Taiwan’s exports are likely to remain strong as the drag in commodities orders likely dissipated while rising prices boost their value
• South Korea, which last week said an expected boom in the semiconductor industry will bolster overall growth, said early trade data showed exports continuing to rise in December despite a raging pandemic
• Thailand will announce customs exports on Wednesday
• Read: Weak U.S. Dollar Tests Asian Economies Hoping for Higher Exports

Other Data, Events

• China’s loan prime rates -- a benchmark for banks’ corporate lending rates -- were kept steady on Monday, extending a seven-month streak. With a solid rebound in economic activity, Bloomberg Intelligence sees little reason for an adjustment in coming months, although the one-year rate could decline by 10 basis points in 2021
  • The offshore yuan and onshore yuan are the best-performing currencies in Asia this year
  • Read: China’s Central Bank Going It Alone Spurs an Influx of Capital
• Malaysia will release inflation data on Wednesday
• Hungary will post its current-account balance for the third quarter on Monday as well as trade balance numbers for October on Wednesday
• Poland is set to report the decline in retail sales deepened during November on Monday
• South Africa is set to report its November budget balance on Tuesday
  • The rand was the best-performing emerging-market currency last week
• Argentina will post its November trade balance on Tuesday
  • The peso is poised to become the worst-performing currency in emerging markets for a sixth year in a row
• Traders will watch a reading of Brazil’s mid-December inflation on Tuesday, the last significant local macro data this year

• Mexico will release October retail sales data on Monday and economic activity on Wednesday, likely adding to evidence of a slow and uneven recovery, according to Bloomberg Economics

  • A reading of inflation for the first half of December, also scheduled for Wednesday, is expected to show price-growth slowing marginally
  • The nation’s November unemployment rate, meantime, may slip from a month earlier.

©2020 Bloomberg L.P.