Mercurial Mood Grips Emerging Markets Tiptoeing Into July

(Bloomberg) -- The coming week looks set to encapsulate the bipolar nature of emerging markets as effectively as any this year.

The rising wave of Covid-19 infections, notably in India, Indonesia, Brazil and the U.S., continues to create nervousness about how quickly developing economies can reopen. Expected market swings aren’t receding as much as they are for developed countries. In fact, the gap between implied volatility in emerging-market currencies and their Group-of-Seven peers is at the widest in almost four weeks.

Yet, the fountain of liquidity provided by the world’s leading central banks is helping to sustain a contrary narrative -- that an economic rebound isn’t far off. A gauge of developing-nation currencies is on course for its best month this year, stocks as measured by the MSCI Inc. index have climbed in June by more than 6%, and both domestic and dollar bonds are in the green.

“Emerging-market debt, by and large, can sustain the rebound given the unprecedented fiscal and monetary policy actions by the major economies, barring a second wave larger than the first one for Covid-19,” said Jens Nystedt, a New York-based money manager at Emso Asset Management, which oversees $5.5 billion.

“Large real interest-rate differentials will allow emerging markets to attract portfolio inflows among the better-quality names” he said.

EM Weekly Podcast: H.K. Security Legislation; Second-Wave Risks

China’s Proposed Law

• A tense holiday on Wednesday marking 23 years of Chinese rule in Hong Kong could spark local protests and aggravate U.S.-China tensions
• China’s top legislative body will vote on Hong Kong’s security legislation Tuesday morning, Now TV News reported. Critics say the proposed law will rob residents of the former British colony of many political freedoms
  • Read: China Law to Establish ‘Red Lines’ for Hong Kong, Adviser Says
• Profits of Chinese industrial enterprises rebounded in May for the first time since November, signaling that the economy continues to recover from coronavirus shutdowns
• China will release manufacturing outlook numbers on Tuesday that are expected to show the economy continued to recover in June
  • That could help boost the Shanghai Composite Index back above the 3,000 level for the first time in three months. The Caixin gauge of manufacturing is expected Wednesday, while the services index will be announced Friday

Colombia Easing

• Colombia’s central bank is likely to reduce its overnight lending rate by 50 basis points to 2.25% on Tuesday
• Bloomberg Economics expects policy makers to keep a dovish tone, leaving the door open for more easing. The minutes of the meeting will be released on Wednesday, giving investors more detail on the decision
• The Colombian peso has outperformed its Latin American peers this quarter, with fewer confirmed infections than its neighbors

16 More Years?

• Russia is voting on constitutional changes backed by the Kremlin, including a measure that would allow President Vladimir Putin to seek two more six-year terms once the current one, his fourth, ends in 2024
  • Putin is already the longest-serving leader of the world’s largest country by landmass since Soviet dictator Josef Stalin
• Voting is spread out over time, with the final day set for July 1
• The ruble is the top gainer in emerging markets, after Indonesia’s rupiah, this quarter

South Africa’s Contraction

• South Africa’s economy probably contracted by 4% in the first three months of the year, data may show on Tuesday. That would be a third straight quarterly contraction and won’t yet include the effect of the coronavirus lockdown that kicked in at the end of March. The second quarter will probably see an even deeper contraction, according to Bloomberg economist Boingotlo Gasealahwe
• Even then, one-month risk reversals showed that traders pared their bearish bets on the rand last week, ahead of data which will provide clues on the economy’s performance this quarter. They include trade balance, manufacturing and whole-economy PMIs

Poland Votes

• The Polish zloty rose on Monday as voters denied President Andrzej Duda’s bid for quick re-election, forcing him into a runoff that risks halting a nationalist makeover of the eastern European country
• The country will release the flash CPI for June on Tuesday, and June PMI the next day; on Tuesday it will also present bond supply plans for July and the third quarter
• Recent interest-rate cuts have brought the benchmark to a record low of 0.1%. The zloty will probably underperform other Eastern European currencies, with the central bank in the midst of one of the emerging world’s biggest quantitative-easing programs, ING said last week

Argentina, Brazil

• Argentine economic activity data for April, to be posted on Monday, will flag the impact of a full month of nationwide quarantine
  • Debt talks are continuing after Economy Minister Martin Guzman said the government had reached an understanding -- but not an agreement -- with one group of creditors to restructure $65 billion in overseas debt
  • The nation presented a new ‘final’ plan to foreign creditors, Clarin newspaper reported
• Brazilian employment data, to be released on Tuesday, will probably show an increase in the jobless rate in May as the nation became a new epicenter of the coronavirus pandemic
  • On Thursday, investors will watch industrial production figures for further signs of weakness in the same month
• The Argentine peso and Brazilian real have been the worst emerging-market currency performers since end-March

Turkish CPI

• Turkey’s year-on-year inflation probably accelerated to about 12% in June, from 11.39% the previous month
  • The data comes after Turkey’s central bank last week unexpectedly held off on cutting interest rates for the first time since Governor Murat Uysal took over in July
  • The lira weakened for a third week in the five days through Friday

Asian Data

• Malaysia, Indonesia, South Korea, the Philippines, Thailand, Taiwan, India and Vietnam will see an update on factory outlook for June. The data might show an improvement and could bolster sentiment on a gauge of EM Asia stocks, which is steadying after surging more than 30% from a March low
  • Read: Philippine Central Bank Chief Sees No Need for Rate Cut Now
• South Korea’s June trade figures -- often seen as a crucial indicator of global demand -- will be out on Wednesday. Export figures in the first 20 days of the month showed a smaller decline, offering some cautious optimism that a slump has passed its nadir
  • The country will also report industrial production on Tuesday, inflation on Thursday and foreign reserves on Friday
  • Consumer price inflation is seen staying negative amid weak demand and lower energy costs, according to Bloomberg Economics. The risk of sustained deflation adds to the case for the Bank of Korea to maintain an accommodative policy stance, it said
  • The won is the top currency in emerging markets this month
  • Read: South Korea Finance Minister Sees Third Extra Budget as Last
• India will release its fiscal deficit for May on Tuesday. The nation’s bonds fell last week amid heavy debt supply, with the yield on benchmark 10-year notes reaching a six-week high
• Inflation data is also due from Indonesia and Thailand this week, which will help determine how much room is left for policy makers to add stimulus
• Vietnam reported on Monday its economy unexpectedly grew in the second quarter, though at the slowest pace in at least a decade. Stocks, which are Asia’s biggest losers in June, fell after the data

©2020 Bloomberg L.P.