An investor walks past an electronic stock board at a securities brokerage in Shanghai, China. (Photographer: Qilai Shen/Bloomberg)

China Sets Tone for Emerging Markets Suffering From Yield Fever

(Bloomberg) -- China joined an emerging-market rout sparked by the jump in U.S. Treasury yields as mainland markets reopened after a week-long holiday.

The latest move by the People’s Bank of China to reduce reserve requirements for lenders failed to mitigate the blow. The onshore yuan declined as much as 0.5 percent to 6.9069 per dollar Monday, while stocks on the mainland tumbled. Equities and currencies in other developing-nations slid.

China Sets Tone for Emerging Markets Suffering From Yield Fever

Events in Brazil and Turkey are also likely to keep traders busy this week. The real’s implied volatility was at the highest since May last year as Jair Bolsonaro, the far-right former Army captain, led in the first round of Brazil’s presidential elections held Sunday. Turkey is due to publish current-account data Thursday, with many economists forecasting a record surplus, while the next hearing into a detained American pastor -- the cause of a diplomatic spat with the U.S. -- is scheduled for Friday.

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Treasury 10-year yields rose the most since February last week as stronger U.S. data added to the case for reduced stimulus measures from the Federal Reserve. Emerging-market stocks tumbled 4.5 percent in the five days through Friday, their worst performance since February, while currencies and domestic bonds dropped the most since August.

“The dollar’s rally will likely continue,” with the Fed seen extending its policy of gradual interest-rate increases at least through the end of 2019, said Richard Segal, a senior analyst at Manulife Asset Management Ltd. in London. “That and the U.S. bond-market reaction will weigh on emerging markets, especially the local-currency market. Keep to the higher-quality credits in the dollar markets and keep shorter durations.”

Read More: After the Bond Rout, Traders Gird for $230 Billion Auction Flood

All Eyes on China

  • The central bank lowered the required reserve ratio for some lenders by 1 percentage point, effective Oct. 15
  • The cut will release a total of 1.2 trillion yuan ($174 billion), of which 450 billion yuan is to be used to pay maturing medium-term funding facilities
  • “The cut shows that Beijing is using easing measures to stabilize market sentiment and stimulate economic growth,” and was bigger than what the market had expected, Guillaume Tresca, a strategist at Credit Agricole SA in Paris, wrote in a note Monday. “However, with the escalation of the U.S.-China trade conflict, we believe RRR cuts alone will not be enough to revive the economy”
  • “Chinese policymakers appear to favor a stable yuan for the time being,” Goldman Sachs Group Inc. strategists including New York-based Zach Pandl wrote in a report on Oct. 5. “Despite an imperfect domestic economic picture, we see our 3-month USD/CNY forecast of 6.9 as appropriate for now”
  • The country’s trade balance will also be a focus on Friday after “softer PMIs in China at the beginning of the month raised nerves around the impact that the trade war was having,” Australia & New Zealand Banking Group Ltd. analysts including Sydney-based Daniel Been wrote in a note

Bolsonaro Versus Haddad

  • Brazil’s election result puts the seven-time congressman Bolsonaro on track for victory in the decisive, second-round vote on Oct. 28, when he will face his closest challenger, the Workers’ Party candidate Fernando Haddad
  • The real’s one-week implied volatility rose to 36.1 percent Monday, the highest since May 2017; it jumped 85 percent last week
  • Xtrackers MSCI Brazil Ucits ETF rises 1.1% in Germany; the ETF physically replicates the performance of the MSCI Total Return Net Brazil Index
  • READ: Brazil Markets Seen Rallying After Bolsonaro’s Smashing Lead

The Pastor’s Fate

  • A local court could free Andrew Brunson, currently under house arrest in the Turkish coastal town of Izmir, when he appears for a hearing on Oct. 12, the Wall Street Journal reported last month, citing officials it didn’t name. His arrest has exacerbated the lira’s depreciation as U.S.-Turkish relations soured
  • “There had been signs of a cooling of tensions in recent weeks, including suggestions that Pastor Brunson will be released,” William Jackson, chief emerging-markets economist at Capital Economics in London, wrote in an Oct. 5 report. “Anything that comes out of the hearing that dents hopes for a swift resolution to the skirmish could place the lira under further pressure”
  • Turkey will probably announce on Thursday its current account swung to a surplus of $2.5 billion in August, from a deficit of $1.75 billion in July, according to the median estimate of economists. That would be a record monthly surplus, according to Bloomberg data going back to 1984
  • Treasury and Finance Minister Berat Albayrak said over the weekend that the economy has started to re-balance and that public and household debt ratios in Turkey are healthy, state-run Anadolu Agency reported

India Inflation

  • Close attention will be paid to inflation figures due Friday after India’s rupee completed its sixth weekly decline against the dollar that left it at a fresh all-time low. Policy makers surprised markets Friday by standing pat on interest rates
  • The Reserve Bank of India left its repurchase rate at 6.5 percent, while changing the stance of monetary policy from neutral for the first time since February 2017 to “calibrated tightening”

IMF Meeting

  • Central bank chiefs from Brazil, Mexico, Colombia, Peru and Chile are due to attend the International Monetary Fund’s biannual meeting starting Wednesday in Bali, Indonesia. Among likely attendees is Argentina’s Economy Minister Nicolas Dujovne, who helped negotiate a record $57 billion credit line from the IMF this year. The Argentine peso gained last week, but remained 51 percent weaker this year
  • Read more about how global finance chiefs are meeting this week without the firepower of 2008 and with the era of coordination looking like an anomaly

South African Rating Review

  • Moody’s Investors Service is due to review South Africa’s credit ratings on Oct. 12, though the company has said it may delay any action until after mid-term budget on Oct. 24. It changed its outlook to stable from negative in March, making a downgrade less likely
  • Data on business confidence, mining production and manufacturing may give clues to the outlook for the economy after a first-half recession
  • The rand has been the worst performer among peers this month
  • Elsewhere, both S&P and Fitch are set to present their ratings update for Poland on Friday. The companies have positive and a stable outlooks on the nation’s rating, respectively

Peru Rate Decision

  • Peru’s central bank is expected to hold its benchmark rate for a seventh month on Thursday; low inflation and a drop in metals prices are likely to influence the decision; policymakers trimmed their GDP forecast for 2019, making a rate hike anytime soon unlikely; the Peruvian sol fell last week
  • Israel and Serbia will also decide on monetary policy

Other Data

  • Investors in Hungary will focus on September inflation data due on Tuesday for confirmation that price growth is peaking, with the central bank expecting a slowdown in inflation into the year-end to support its pledge to keep financing conditions loose
  • Egypt will announce CPI on Wednesday; the central bank is set to keep rates unchanged in 2018, even with inflation within target “amid weak financial-market sentiment towards emerging economies,” Standard Chartered said in a report
  • South Korea announces current-account data for August on Thursday and September unemployment rate on Friday
  • The Philippines releases trade data for August on Wednesday

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