Emerging Markets May Get Tough Lesson on Complacency Over Rates

(Bloomberg) -- Central bank meetings are turning into something of a minefield for emerging-market investors.

Turkey will announce its rate decision on Thursday, with estimates for a reduction ranging from 50 to 800 basis points. Russia is expected to ease monetary policy a day later.

The concern among analysts is that central banks, especially Turkey’s, will disappoint investors by lowering borrowing costs too aggressively, eating away at the relatively high real rates in emerging markets. But that risk hasn’t been priced in, with implied volatility for currencies near the weakest level since 2014 and the yield on local bonds at a record low.

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Currencies as they are “getting to a point where they are cyclically overvalued,” said Anders Faergemann, a fund manager in London at PineBridge Investments. “The wall of money looking to target in on emerging markets makes for a challenging investment environment as fundamentals are getting more fragile.”

Read More: In World of Negative Yields, These Emerging Markets Are Standout

Every currency across developing nations has risen since May 17 after concern over global growth spurred the world’s most powerful central bankers to turn dovish, prompting a hunt for yield. That helped narrow the difference in implied volatility between emerging-market currencies and their developed peers to the smallest since March 2018, according to JPMorgan Chase & Co. indexes.

Cut! Cut! Cut!

• Turkey’s rate decision will be a first for Murat Uysal, who unexpectedly replaced Murat Cetinkaya as central bank governor earlier this month
• The median forecast is for a 225-basis-point cut in Turkey’s one-week repo rate, now at 24%, a move that would lower the real rate to a little over 6%. That would still be among the highest in emerging markets. But given President Recep Tayyip Erdogan’s push for lower borrowing costs, the concern is the central bank may opt for an aggressive cut, which could trigger a sell-off in the lira and a pickup in inflation
  • “The central bank could trigger another currency crisis with a deeper-than-expected cut,” Ziad Daoud, the Dubai-based chief Middle East economist at Bloomberg Economics, wrote in a report. The market is pricing in a 200-250 basis point reduction, he said
  • Read: Turkey’s Mission to Lower Rates Could Take Longer After Shake-Up
• Russia is expected to reduce its benchmark rate by a quarter point on Friday as the ruble outperforms all of its peers this year
• Hungary’s central bank will probably keep its policy rate unchanged after a small tightening step in June. The next adjustment may come in September, when rate setters will review their stance based on updated economic forecasts
• In Africa, Kenya and Nigeria are seen holding borrowing costs for now on rising inflation. Angola, which has been easing since last July, will decide on its next move Friday, as it seeks to boost growth after a contraction last year
• Colombia’s central bank will probably keep its key rate unchanged when it meets Friday amid optimism about recovering growth. The peso led gains among Latin American peers last week
• The Reserve Bank of India, the most aggressive central bank in Asia this year to ease policy, signaled a more cautious stance on future action. Policy makers have effectively delivered more easing than the three interest-rate cuts this year, RBI Governor Shaktikanta Das said in an interview

Inflation, Trade War Impact

• In Brazil, money managers will on Tuesday watch for another low inflation reading, which could feed expectations that the central bank will make its first rate cut in more than a year. The government may also announce on Wednesday a measure to try to boost consumption
• After last week’s widely expected rate cut by South Africa’s central bank, the first in more than a year, inflation data on Wednesday will help investors to gauge the direction of monetary policy in the coming months. Data in line with expectations would bolster the market’s confidence in another rate reduction this year
  • South African Reserve Bank Governor Lesetja Kganyago will deliver a public lecture about monetary policy, inflation and sustainable economic growth in Pretoria on Wednesday
  • South Africa will ramp up support for its ailing state-owned power utility Eskom Holdings SOC Ltd. with an additional 59 billion rand ($4.2 billion) spread over two years, according to a copy of a special appropriations bill seen by Bloomberg
• South Korea reports preliminary second-quarter GDP data on Thursday after its central bank last week unexpectedly cut its policy rate and lowered growth forecasts. The U.S.-China trade war, China’s own economic slowdown and a slump in the semiconductor sector have sent Korean exports tumbling. Growing tensions with Japan have further dimmed the outlook
• Further shedding light on the impact of the prolonged trade war, South Korea’s exports, a bellwether for global trade, looked set for an eighth straight monthly decline. Data on Monday showed shipments during the first 20 days of July fell 14% from a year earlier
  • Thailand’s exports declined 2.15% in June from a year earlier, a fourth straight month of declines, the Commerce Ministry reported on Monday. June export orders from Taiwan fell by 4.5%, worse than the median of economists’ estimates
• May economic activity data in Argentina, set to be released on Thursday, is expected to offer more evidence that the economy came out of a recession in the second quarter as its currency outperformed regional peers
• Philippine President Rodrigo Duterte vowed to reimpose the death penalty to double-down on his war on drugs as he enters the midpoint of his six-year term
  • Duterte also asked Congress to lower corporate income taxes and raise levies on alcohol and tobacco in his annual State of the Nation Address on Monday
  • Philippine stocks last week entered a bull market and the peso in 2019 may end a six-year losing run
• The International Monetary Fund will probably justify central banks’ moves to cut rates when it updates its forecasts for the global economy on Tuesday. In April it forecast growth of 3.3% this year, the weakest since 2009
  • Second-quarter U.S. GDP due Friday is forecast to slow to 1.8%, the weakest pace since early 2017
• Lebanese bonds fell Monday even after parliament passed an overdue, deficit-cutting 2019 budget

--With assistance from Karl Lester M. Yap, Alec D.B. McCabe, Philip Sanders and Sydney Maki.

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

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

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