History Haunts Emerging Markets on Turkey-Contagion Anniversary

Justin Carrigan

01 May 2019, 04:44 PM IST

(Bloomberg) -- Emerging markets limped toward the end of the month feeling the sting of a disappointing Chinese manufacturing report, poor industrial production data from Korea and a profit miss from Samsung Electronics. The won and the rupiah led declines in foreign exchange, dollar-bond yield spreads widened relative to U.S. Treasuries and the MSCI index of stocks, ignoring yesterday’s fresh record on the S&P 500, headed for its first retreat in three days.

Set against a backdrop of a stubbornly strong dollar, no resolution yet to the trade dispute and country-specific risks from Turkey to South Africa and Argentina, it wasn’t looking good almost exactly 12 months on from the start of the 2018 Turkey-contagion wobble. A look at the seasonal history didn’t offer much comfort either. MSCI Inc.’s main emerging-market currency and stock indexes have declined during the month of May in seven of the past 10 years. All of which sharpens attention on the Federal Reserve tomorrow.

Credibility Challenge

Talking of idiosyncratic risks, Turkey’s central bank just released its quarterly inflation report. As of the time of writing, Governor Murat Cetinkaya was trying to say the right things on the thorny subject of using currency swaps to boost reserves, though he stressed that the details would come in an accompanying report. Markets weren’t impressed. The lira was on the cusp of dropping through 6 per dollar for the first time since October. It just seems that policy makers have too much work to do to regain credibility, especially after last week’s surprise removal of the commitment to raise rates further if necessary -- something Cetinkaya tried to dial back today. Throw in the Istanbul election dispute and the threat of U.S. sanctions over the Russian missile purchase and there are few reasons for the lira to find any footing here. As Rabobank’s Jane Foley and Piotr Matys wrote today, a break higher seems inevitable, keeping the lira on track to revisit the October high at 6.2282 per dollar before long.

China Warning

Despite that uninspiring PMI report, the Shanghai Composite registered a 0.5 percent gain --possibly in anticipation of further easing -- brightening the outlook as traders headed toward the three-day holiday. But as Bloomberg’s China equities team highlighted today, increased foreign share selling, waning performance relative to the rest of the world and a slowdown among momentum-driven stocks are taking the edge off sentiment. Adding to the gloom today: Kangmei Pharmaceutical Co., one of the country’s largest listed drugmakers, said it overstated cash holdings by $4.4 billion, triggering a 10 percent share slump.

Argentina Policy Change

Argentina’s kitchen-sink approach to shoring up the peso entered new territory yesterday. The central bank said it would step up intervention in the currency market following last week’s selloff, its fourth policy change in six weeks, prompting a 3.2 percent rally. The move entails effectively scrapping the non-intervention zone that the bank imposed last October as part of the deal with the IMF, which is managing a record $56 billion credit line for Argentina. It may look like throwing good money after bad, yet the IMF has given the policy its blessing, a crumb of comfort for President Macri in his anti-inflation battle. For the record, Bloomberg’s New York-based emerging-market strategist, George Lei, wrote a piece almost exactly a year ago saying the pattern of history suggested a gloomy outlook for the peso. Well, it’s lost 52 percent of its value since then.

Philippines Upgrade

Finally, the Philippines just got a debt upgrade from S&P Global Ratings, a welcome vote of confidence as the country prepares to tap capital markets with a Eurobond. The debt was lifted one step to BBB+ with a stable outlook, the nation’s first increase at the rating company in five years and a reflection of the encouraging economic backdrop. The rating is seven levels below the top grade and on par with Mexico, Thailand and Peru. Moody’s Investors Service has the Philippines one step lower at Baa2.