U.S.-China Angst Tests ‘Sell in May’ Mantra for Emerging Markets

(Bloomberg) -- Even without all the prevailing risks to the global economy, emerging-market investors head into the first full week of May with history against them.

In eight of the past 10 years, May has proved a losing month for stocks, currencies and local bonds in developing economies.

The uncertainty over the Covid-19 pandemic, a resurgence in U.S.-China tension and the collapse in corporate earnings merely make the likelihood of declines this coming week all the stronger. Emerging-market stocks dropped as much as 3.2% on Monday while implied currency volatility increased for a second day after President Donald Trump revived an attack on China, speculating the country may have spread the coronavirus and threatening trade tariffs.

“The biggest new development that could weigh on emerging markets is the pick-up in geopolitical tensions between the U.S. and China,” said Eric Stein, Boston-based co-director of global fixed income at Eaton Vance Corp., which manages about $500 billion. “Negativity still hangs over the asset class,” even as global monetary and fiscal stimulus lifted emerging markets during April, he said.

Purchasing managers’ index data due for release from a number of developing countries this week are providing clues on the depth of the downturn. Data on Monday showed factory output across several Asian countries slumped to record lows in April, signaling a deeper contraction in the world’s manufacturing hub even as China restarts some operations. Last month’s gains in the Indonesian rupiah and Philippine peso may be tested as the two nations announce gross-domestic-product data.

Interest-rate decisions will also be in focus in Malaysia, the Czech Republic and Chile. The most significant policy meeting may be in Brazil, where a fresh political storm involving President Jair Bolsonaro and the easing of lockdown measures even as the virus infection rate rises have combined to make the real the world’s worst-performing currency this year.

EM Weekly Podcast: U.S.-China Tension; Seasonal Risk; Ugly PMIs

More Easing

• Brazil’s central bank will probably cut its key interest rate by another 50 basis points on Wednesday, even after hinting at other methods to prop up the economy
  • Investors will watch a Monday lower house vote on a bill that would set a separate budget for coronavirus-related measures and allow the central bank to buy bonds in the secondary market. Brazilian policy makers will also have to take into account industrial-output figures for March due for release on Tuesday

• Malaysia’s central bank is expected to cut rates on Tuesday for the third time this year to help shield the economy from the impact of the coronavirus. Bank Negara Malaysia lowered its overnight policy rate by 25 basis points to 2.5% and slashed the reserve requirement ratio by 100 basis points at its previous meeting on March 3

  • The central bank may be reluctant to cut again this week because of that, according to Wellian Wiranto, an economist at Oversea-Chinese Banking Corp. Ltd. in Singapore. Bank Negara may also keep rates on hold due to there being a six-month moratorium on loans, so lower rates would have little impact right now, he wrote
• Czech policy makers will probably lower their benchmark rate by half a percentage point to 0.5%
  • The outlook for more easing has boosted demand for the country’s bonds and helped the government borrow a record amount in late March and April
  • The rate should drop to a “technical zero” eventually, central-bank board member Oldrich Dedek said last week
• Hungarian bonds have rallied as the central bank prepares to make its first purchases this week, as part of a quantitative-easing program. The monetary authority will buy government bonds and mortgage notes, primarily with maturities of at least three years, in the secondary market
• Traders expect Chile’s policy makers to hold their key interest rate at 0.5%, the lowest since 2009, when they meet on Wednesday
  • The same goes for Peru, where the central bank is expected to leave rates at an all-time low on Thursday. The sol was one of the best-performing emerging-market currencies in April
• Minutes on Monday from Colombia’s April central bank meeting will probably make the case for more rate reductions. Mexican inflation data for April will also probably support lower policy rates
  • Both countries have been hit by the slump in oil prices this year, with their currencies among the worst performers in emerging markets

Argentina’s No Deal?

• An agreement between Argentina and its bondholders over a debt restructuring proposal seems far off. The government needs support from creditors owning at least two-thirds of the aggregate holdings, but tensions have been so high that some large investors won’t even join video calls with officials. Without a deal, a hard default is becoming more likely, according to Bloomberg Intelligence’s Damian Sassower
  • The nation will keep working toward a deal if, as seems likely, the offer is rejected, Economy Minister Martin Guzman told Argentine daily Clarin

Dismal Data

• South Korea reported inflation slowed in April as the coronavirus and the oil slump weighed on the costs of some goods and services. Prices also increased at a slower pace in Indonesia. Thailand and the Philippines will release inflation data Tuesday, and Taiwan on Wednesday

• Indonesia’s economy probably grew 4.52% to 4.68% in the first quarter, Finance Minister Sri Mulyani Indrawati said last month. The nation will release the official data on Tuesday

  • Philippine data are due Thursday. The country is likely to see a U-shaped economic recovery with a gradual rebound taking place in the fourth quarter, central bank Governor Benjamin Diokno said April 25
• China’s markets are shut Monday and Tuesday for holidays, and the nation will report trade data for April on Thursday. Taiwan will release its trade statistics for the same month on Friday
• Currency-reserves data are also due this week from China, Malaysia, Thailand, the Philippines and Indonesia

African PMIs

• Business activity in South Africa’s manufacturing industry fell to a record low in April, when a nationwide lockdown aimed at curbing the spread of the coronavirus pandemic brought output to a near standstill
  • Still, the rand strengthened as the headline PMI number exceeded economists’ median estimate
• On Wednesday, full PMIs for South Africa, Nigeria, Mozambique, Kenya, Ghana and Zambia come out

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