Suffering emerging markets look to Powell

  • Markets
  • Tuesday, 20 Aug 2019

With stocks and currencies across the developing economies on the retreat, the Federal Reserve chairman Powell's(pic) address at the Kansas Fed’s annual Jackson Hole gathering on Friday will be key to gauging whether US policy makers will add to July’s so-called hawkish rate cut.

Dubai: Investors will be hanging on Jerome Powell’s(pic) every word this week for clues as to whether the current nervousness gripping emerging markets is justified.

With stocks and currencies across the developing economies on the retreat, the Federal Reserve chairman's address at the Kansas Fed’s annual Jackson Hole gathering on Friday will be key to gauging whether US policy makers will add to July’s so-called hawkish rate cut.

Signs of further easing may help reverse losses that have made some emerging-market assets cheap relative to their likely returns, according to Morgan Stanley.

“Policy action, including from the Fed, and natural cyclical forces should eventually help activity to recover, ” strategists including London-based James Lord said in an emailed note dated Aug 18.

“Emerging-market risk assets tend to overshoot and undershoot fair value, with particularly large downside moves in the May-to-October time frame, ” they said, adding that more time and lower valuations are needed to win back investors.

With concern growing that the global economy is headed for a recession, emerging-market sovereign bond spreads are on course for the biggest monthly increase since 2012, while the average yield on hard-currency securities rose last week by the most since in a year.

Estimated price-to-earnings ratios for stocks are near the lowest level since January.

Local-currency bonds in developing markets are doing better, with a Bloomberg Barclays index showing the higher-risk debt of nations less impacted by turmoil overseas are continuing to benefit from the collapse in global bond yields.

Egypt reigns supreme in that category, with debt yielding an average 16%, the most in the developing world after Argentina, according to the index.

Even if the north African nation meets expectations with a 100 basis-point cut to its key interest rate on Thursday, its inflation-adjusted rate will remain among the highest in the world. Indonesia and Zambia will also decide on monetary policy this week.

Playing politics

Markets will have a chance to react to Argentine Economy Minister Nicolas Dujovne’s weekend decision to resign. Dujovne, who led bailout negotiations between Argentina and the International Monetary Fund last year, justified his departure by saying the government needs “significant renewal in the economic area” following Mauricio Macri’s defeat to leftist Alberto Fernandez on Aug 10.

The peso last week weakened the most since 2015.

The trade dispute between the United States and China will continue to be a focus for markets.

Beijing vowed retaliation for the looming US tariffs, which it said was a violation of the accords reached between the two leaders.

Trump said over the weekend the United States is “doing very well with China, and talking!” but suggested he wasn’t ready to sign a trade deal.

South Africa President Cyril Ramaphosa is due to respond to lawmakers’ questions in parliament. He will be asked about the funding he received for his 2017 campaign to win leadership of the ruling African National Congress.

The easing cycle

China’s central bank said it’ll start releasing a new reference rate for bank loans today, a further step in a long-awaited reform to interest rates that’s set to bring lower borrowing costs to the economy.

Egypt will probably reduce its deposit rate to 14.75% on Thursday.

Goldman Sachs Group Inc, which also sees 100 basis-point cut, said the central bank has repeatedly stated its view that maintaining “a positive” real rate is appropriate.

Bank Indonesia’s policy meeting on Thursday will be closely watched after three Asian central banks – India, Thailand and the Philippines – cut interest rates earlier this month, with two of them delivering more dovish-than-expected decisions.

Economists are almost split on the central bank’s next move. The monetary authority has been intervening to maintain stability in the rupiah, which has weakened 1.6% this month.

Data from Brazil are forecast to show below-target inflation, reinforcing bets of further rate cuts after the economy probably fell into a recession in the second quarter. Swap rates are pricing in 75 basis points of easing through the end of 2019.

Brazil-watchers will also track the government’s reform agenda as lawmakers debate a tax overhaul bill.

Investors in Mexico will watch inflation data for clues as to whether Banxico will cut borrowing costs again in September after it reduced rates last week for the first time in five years.

An assessment that growth stalled should be confirmed by final gross domestic product data due on Friday.

In South Africa, data tomorrow may show inflation slowed to below the mid-point of the central bank’s target range, providing some room for policy makers to support the economy with a rate cut in coming months.

The rand is the worst-performing emerging-market currency this month after the Argentine peso.

The minutes of the latest meeting of Bank of Thailand’s monetary policy committee will be released tomorrow. They may give further insights into how aggressive the easing cycle will be after authorities unexpectedly lowered the benchmark rate on Aug 7 for the first time in more than four years.

Economic data: Thailand reported yesterday gross domestic product rose 2.3% from a year ago in the second quarter compared with 2.8% in the previous quarter. That’s the slowest pace since the third quarter of 2014 as exports and tourism deteriorated, buffeted by US-China trade tensions and a strong local currency.

Trade data from Taiwan, South Korea and Thailand due this week will shed more light on how the trade war is hurting key Asian economies.

Investors hopeful of policy easing in Poland over the next 12 months will have plenty to chew on.

Poland’s statistics office will present July wages and employment data today, followed by industrial output and PPI print tomorrow, and retail sales on Thursday, the day the central bank will release minutes of the last policy meeting. — Bloomberg

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