Trade Gives Emerging Markets Rest From Dealing With List of Woes

(Bloomberg) -- The threat of U.S. sanctions against Turkey. Political turmoil in Peru and Ecuador. Election risks in Poland and Hungary. A change of direction at South Africa’s Eskom.

The list of worries hanging over emerging markets is about as long as it’s been at any time this year. Yet it’s a measure of the current mindset that trade, rather than any or all of those idiosyncratic concerns, will be the biggest focus this week as Friday’s partial agreement between the U.S. and China provides a moment of comfort.

The relief might still be fleeting. Apart from the many unresolved issues in the negotiations, China’s own economic performance will be at the forefront of investor concerns. Though some economists say data on Friday will show Chinese growth slowed to below 6% in the third quarter -- a likely trigger to a selloff across emerging markets -- the median forecast is still 6.1%.

“China’s economic stabilization is more important than the partial trade deal –- it provides some support to EM markets and lessens China’s motivation for a broader trade deal with the U.S,” James McCormick, global head of strategy at NatWest Markets Plc in London, wrote in a report. “The message will be an economy that continues to slow but is stabilizing on the back of targeted stimulus efforts.”

Read More: Is the World Economy Sliding Into First Recession Since 2009?

The yuan reached its strongest level in almost two months after China’s central bank kept its currency fix flat. That was even as data showed Chinese exports and imports shrank more than expected in September. The country is scheduled to publish inflation data on Tuesday. Industrial production and retail sales numbers are due on Friday.

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Vulnerable Lira

• The lira is likely to remain this week under pressure following its biggest weekly drop since March
  • READ: Turkey Markets Sink as Sanctions Risk Swamps Banks’ Lira Defense
    • The currency’s implied volatility jumped by the most among peers last week as Turkey’s offensive in northern Syria heightens the risk of sanctions
    • Traders also appear to be scaling back wagers for further interest-rate cuts, with the one-year cross-currency swap last week jumping 175 basis basis points, the most since May, to almost 15%
• President Donald Trump said the U.S. “Treasury is ready to go” if additional sanctions are needed on Turkey, without providing a specific timeframe
• READ: Short TRY/RUB as Syria Incursion Damages Turkish Assets: SocGen

Eskom Anxieties

• It’s a big week for Eskom Holdings SOC Ltd., the state-owned electricity company that Goldman Sachs described as the biggest risk to the country’s economy. A policy paper on a restructuring plan for the utility will be presented to President Cyril Ramaphosa’s cabinet. Investors expect the plan to include proposals on how to deal with the company’s $30 billion of debt
• Options traders were on Friday the least bearish on South Africa’s rand since April last year, according to one-month risk reversals
• READ: Five Key Things to Watch For as South Africa Acts to Fix Eskom

Poland and Hungary Vote

• Poland’s ruling nationalists won Sunday’s election to clinch another four years in power to build a modern welfare state, according to almost complete results; final results are due by Tuesday

  • The central bank will release current-account data on Monday and the statistics office will announce inflation figures Tuesday
  • The zloty rose against the euro for a fifth day
• In Hungary, Prime Minister Viktor Orban’s party lost control of Budapest and four of the country’s biggest cities, in a major rebuke to his rule after a video of one of his allies at an orgy handed a last-minute gift to a galvanized opposition
  • The forint strengthened versus the euro

Data and Decision

• Policy makers at the Bank of Korea meet on Wednesday to decide whether to go ahead with a second rate cut this year
  • BOK Governor Lee Ju-yeol told parliament he wasn’t confident the economy can achieve the central bank’s growth target of 2.5% for 2020 amid a global deceleration and a cooling of demand for technology products. At 1.5%, South Korea’s key rate is just 25 basis points from a record low
• Argentina’s September inflation data will be closely watched Wednesday for any spike in prices after the collapse in the peso the previous month
  • Presidential debates ahead of the Oct. 27 vote may also weigh on markets, with the opposition widely expected to win a comfortable majority
• Peru will publish economic activity data for August on Tuesday, with analysts surveyed by Bloomberg forecasting the fastest growth this year
  • The sol is among a handful of emerging-market currencies that have risen this year
• In Colombia, manufacturing and retail sales growth both probably slowed in August, Tuesday releases are expected to show. The nation’s trade balance for the same month, to be published Friday, will probably show a larger deficit than a year ago, according to Bloomberg Economics
  • The Colombian peso rose over the last week, though it’s still down year-to-date

--With assistance from Tomoko Yamazaki and Philip Sanders.

To contact the reporters on this story: Netty Ismail in Dubai at nismail3@bloomberg.net;Lilian Karunungan in Singapore at lkarunungan@bloomberg.net;Robert Brand in Cape Town at rbrand9@bloomberg.net;Sydney Maki in New York at smaki8@bloomberg.net

To contact the editors responsible for this story: Dana El Baltaji at delbaltaji@bloomberg.net, Justin Carrigan

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