Beware the Jerome Powell Bump in Emerging Markets

(Bloomberg) -- Dovish comments from Federal Reserve Chairman Jerome Powell have given some tailwind to emerging-market assets, but it may take more from the central bank to keep the rally going.

Developing-nation currencies strengthened as Powell’s signal that interest rates will stay low for longer weighed on the dollar. The South African rand increased the most among peers, followed by the Polish zloty and Hungarian forint. Emerging-market stocks were little changed, reversing the initial declines they made on Thursday after the Fed Chairman spoke at the central bank’s annual policy symposium at Jackson Hole.

While Powell announced a shift toward letting inflation and employment run higher, he stopped short of providing details about how the new policy goals would be met. He failed to make any mention of yield-curve control, which markets believed could be part of the toolbox, fueling concern that nominal yields might be allowed to rise. That has put emerging bonds under pressure.

“The initial reaction was a bit of a knee-jerk as EM bonds followed global sovereign bonds lower,” said Nader Naeimi, head of dynamic markets at AMP Capital Investors in Sydney. Should the Fed’s change in policy framework cap real yields and push the dollar lower, that would benefit emerging markets, he said.

All eyes will now be on the Fed’s September meeting for further clues on forward guidance and the asset-purchase program.

With stocks close to all-time highs and the risk of U.S. Treasury yields rising, volatility ahead could lead to a slump in the global risk rally, said Stephen Innes, chief market strategist at Axicorp Ltd. “There’s still lots of uncertainty into the FOMC meeting.”

EMEA:

• Belarusian authorities stepped up pressure on the opposition with mass arrests during a protest after Russian President Vladimir Putin offered more support to his embattled ally Lukashenko
• The Russian ruble is one of the worst performers in emerging markets in the period, even as oil rebounded by almost 30%, prompting analysts at Citigroup Inc. and Sova Capital to suggest the ruble is fundamentally undervalued

LATAM:

• Argentina won’t seek fresh funding from the International Monetary Fund when it starts negotiations over a new program, the nation’s representative to the Washington-based lender said
• Brazil’s economy chief, facing growing pressure to loosen the purse strings, will stay in the job as long as President Jair Bolsonaro keeps the country on track to fiscal austerity

ASIA:

• Shinzo Abe said he would resign as Japan’s Prime Minister due to health reasons, ending his run as Japan’s longest serving premier
• Taiwan’s government has finally yielded a long-standing obstacle to a free-trade agreement with the U.S.: American pork and beef
• China said Donald Trump was putting his and the Republican Party’s needs over those of the U.S., after the president said that under him, America would take its business out of China

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