Emerging-Market Traders Defy August Risks to Bet on Strength
Stock market movements on an electronic display in New York, U.S. (Photographer: Michael Nagle/Bloomberg)

Emerging-Market Traders Defy August Risks to Bet on Strength

If emerging markets can get through the final week of the month without too many hiccups, some investors might consider July to be a platform for recovery.

The benchmark MSCI stock index has risen more than 7% this month, underpinned by gains in Brazil, China and India, while the Hungarian forint and Chilean peso have led a rally in currencies. Brazil and South Africa have just helped drive the Bloomberg Barclays index of domestic bonds to a fifth week of gains, their longest-winning streak since January, while dollar bonds have clocked up a 13th positive week, the best result since 2011. Investors added money to emerging-market exchange-traded funds for a third week, with more than half of the inflows going to China-dedicated ETFs, the longest streak since January.

“Dollar liquidity will continue to provide support, growth data is stabilizing and debt-capital market access is available for most credits,” said Paul Greer, a money manager in London at Fidelity International, which oversees about $566 billion. “We are optimistic on emerging-market currencies in the near term given the weak U.S. dollar backdrop, competitive valuations, low inflation, improving current accounts, recovering PMIs and very light positioning.”

Confidence in emerging markets is being buoyed by unprecedented stimulus efforts by the world’s leading economies, with last week’s approval by European Union leaders of a 750 billion-euro ($878 billion) recovery fund providing the latest spur. The Federal Reserve will probably signal more accommodation ahead when policy makers meet July 28-29. U.S. lawmakers are trying to hammer out another round of pandemic relief before current support expires at the end of this week.

Emerging-Market Traders Defy August Risks to Bet on Strength

Still, risks to the rally abound. Never mind that August is rarely a positive month for emerging-market assets: Paltry signs of progress in stemming the spread of the coronavirus, coupled with fresh twists in the deteriorating relationship between the U.S. and China, will suffice to keep traders on the back foot. Tension continued to simmer over the weekend as Beijing slammed the “forced entry” to its Houston consulate by U.S. personnel and vowed to respond “as necessary.”

More on Emerging Markets:
Read: Short Rand, Real Are Best Trades for ‘Dangerous’ August: SG
Listen: EM Weekly Podcast: China Data, Geopolitics
Read: Emerging Markets and Covid-19 Risk -- What You Need to Know

Here’s what to watch for in the days to come:

China’s Rebound

  • China’s industrial profits for June came in at 11.5% year-over-year on Monday, above Bloomberg Intelligence’s forecast for 7%. The relatively strong result helps justify the performance of Chinese stocks, which are up around 10% this year despite Friday’s slump
    • Official Chinese PMI data for both manufacturing and services due this Friday is forecast to remain in expansion territory for July, roughly in line with the previous month
    • Despite the rebound in the local economy, the yuan has surrendered ground on geopolitical concerns, underperforming the CFETs basket for the past two weeks

Colombia Easing

  • Policy makers in Colombia are expected to cut interest rates by 25 basis points on Friday and leave the door open for more easing, according to Bloomberg Economics
    • The Colombian peso has been unable to strengthen past its 200-day moving average at around 3,600 per dollar this month
  • Chile’s central bank meeting minutes, to be posted Friday, will probably reiterate the dovish monetary policy outlook. There may also be a discussion about the effective lower bound for policy rates, and the potential for purchasing government bonds in the secondary market as the central bank awaits congressional approval
    • The South American nation will also release a slew of data for June on Friday, which may show increasing unemployment and falling retail sales and industrial production, according to Bloomberg Economics. Copper production figures for June will also be released on Friday
  • Policy makers in Ghana, Kenya and Angola will probably keep rates unchanged this week as they contend with weak currencies and rising consumer prices

Data and Events

  • South Africa’s consumer price index probably ticked higher in June, data may show on Wednesday, though still staying below the lower limit of the central bank’s target range. That may leave room for more easing, though the central bank signaled last week it was nearing the bottom of its rate-cut cycle
    • The rand is still well positioned to benefit from the global search for yield. Even after last week’s quarter-point rate cut by the Reserve Bank to 3.5%, the real rate is still around 1.4%
  • Turkey’s central bank will unveil its latest year-end inflation forecast in its quarterly report on Wednesday. Bloomberg Economics predicts a marginal upward revision to its projection. At last week’s policy meeting, the central bank said price growth may exceed its projections
    • The lira has trailed most of its peers this year
  • Malaysia’s trade numbers for June will be released on Tuesday with consensus expecting a slowdown in the contraction of both exports and imports
  • South Korea will release June industrial production figures on Friday, which are expected to improve month-over-month, though remain negative in year-over-year terms as the nation continues to lag Taiwan’s recovery. On Saturday, trade data for the full month of July will be available
  • Taiwanese provisional GDP data on Friday is expected to illustrate its superior economic recovery compared to most of Asia with the nation forecast to avoid a contraction
    • That said, the Taiwan dollar’s outperformance versus the Korean won has stalled over the past four months
  • Thai June IP, due on Wednesday, is expected to remain deeply in contraction. June’s current account numbers will be released on Friday. Although June tends to be seasonally strong, trade figures for the month were disappointing and any strength may be temporary as the current account takes a hit from weak tourism
    • The baht is the biggest losing emerging market currency this month
  • A preliminary reading of Mexico’s second-quarter gross domestic product on Thursday will likely show a sharp contraction compared to a year earlier after economic activity plunged 22.7% in May. Economists surveyed by Bloomberg forecast a near 20% contraction from a year earlier, which would be the worst ever
  • Brazilian unemployment data for June, expected on Wednesday, may show a jump in the jobless rate. Traders will monitor congressional debates on consumption taxes, with interest high for any additional proposals submitted by the government to reform the tax system
  • Argentina will continue to work toward a deal with creditors to restructure $65 billion in external bonds. Some strategists say that an accord is just pennies away after the three largest creditor groups teamed up to propose a counteroffer
  • Dana Gas PJSC hired Houlihan Lokey Inc. for financial advice on nearly $400 million of Islamic bonds due in October, indicating the UAE energy producer may be facing difficulties repaying debt
  • The market remains on alert for the U.S. Treasury report on currencies, as discussed in the previous week ahead

©2020 Bloomberg L.P.

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