Carry Trade Lifts Emerging Markets Still on Lookout for Growth

LAGOS (Capital Markets in Africa) – If the muted reaction to the flurry of potentially market-moving events last week is anything to go by, emerging-market currencies are unlikely to be headed into a period of major price swings. But that’s just fine for the carry trade.

A Bloomberg currency index that measures carry-trade returns from eight emerging markets funded by short positions in the dollar gained for a second week in the five days through April 12, its first back-to-back increase in more than two months. At the same time, expected swings in currencies fell for a second week, according to a JPMorgan Chase & Co. gauge.

The dearth of volatility in foreign-exchange markets is evidence that some investors are still looking for further signs of a pick-up in global growth before adding to their positions. Just as China bulls become increasingly confident growth has turned the corner, data on Wednesday will probably show that the world’s second-largest economy expanded at a slower pace of 6.3 percent in the first quarter.

Even so, there are “solid balances of payments generally, and decent carry” in emerging markets, said Paul McNamara, a London-based investment director at GAM (U.K.) Ltd. who’s positioned “fairly cautiously.”

Country-specific risks continue to worry investors, with elections looming in India, Indonesia and South Africa among others. Brazil is still struggling to pass pension reforms and Turkey can’t break from a combination of economic contraction and stubborn inflation.

“Emerging-market assets are attractive from afar and messy up close,” Andrew Sheets, London-based chief cross-asset strategist at Morgan Stanley, said in a note, adding that investors will continue to pour money into developing-nation stocks and bonds. “As in an impressionist painting, we think that the broader view will ultimately win out.”

Indonesia’s Deja-Vu Election

• Indonesians will choose on Wednesday whether to give incumbent President Joko Widodo a second five-year term or elect Prabowo Subianto, a former general who lost in the 2014 race. The official count may take several days. The seventh president of Southeast Asia’s largest economy will be inaugurated on Oct. 20.
• The rupiah was the best-performer in Asia after the Philippine peso in the past month

Brazil’s Pension Vote

• In Brazil, traders will eye the first Congressional vote on the pension reform bill, a much-anticipated overhaul whose progress with lawmakers has become the main driver for Brazilian assets. Any delay in the vote, set for Wednesday, will be perceived negatively, while if the vote happens, markets will focus on the level of support
• Investors will also be watching for developments regarding Lower House Speaker Rodrigo Maia after local media reported that he’s being investigated for taking bribes in connection with the sprawling Carwash probe. Maia is playing a key role in negotiations to pass the pension-overhaul bill

Bank of Korea Meeting

• The Bank of Korea will meet on Thursday amid increasing expectations it will cut rates later this year after an unexpected slide in inflation in March
• Markets are already pricing a potential easing. Yields on three-year government bonds fell below the policy rate in late March for the first time since 2016
• BOK Governor Lee Ju-yeol said on April 1 weakening demand was the factor in slowing inflation, though he reiterated that it isn’t time to consider a rate cut. Record household debt is a consideration when weighing any such move, he said

Focus on China

• As well as first-quarter GDP, China will release monthly readings on retail sales and industrial output that will probably show a pick-up in March
• Wednesday also marks the first maturity of 367.5 billion yuan ($55 billion) of China’s medium-term lending facility, making it an ideal time to cut the reserve-ratio requirement at banks should the GDP report disappoint, according to Kiyong Seong, a strategist in Hong Kong at Societe Generale SA
• Chinese stocks are the biggest gainers in Asia this year. Trade tensions with the U.S. are easing and a deal could be coming while corporate-tax cuts could boost the private sector
• Read more: China Watched for Signs of Stabilization

Turkey’s Troubles

• The nation’s unemployment rate climbed to the highest in a decade, underscoring the economic challenges facing the Middle East’s largest economy
• While improving sentiment toward global growth has fueled interest in emerging-market high-yielding currencies, Goldman Sachs Group Inc. said it remains cautious on the lira, the worst performer in the past month
  • “Without a clear policy framework to anchor expectations, there are few good options available to policy makers to tackle Turkey’s key issues of limited reserves, domestic dollarization and high inflation,” strategists including New York-based Zach Pandl wrote in an April 12 note
  • The lira is set to weaken to 6.75 per dollar in 12 months
• Turkey’s governing AK Party will make an official request to authorities for a new election in the closely contested March 31 mayoral vote in Istanbul after a partial recount currently underway is completed

Argentine Inflation, Asian Trade Data

• In Argentina, the focus is on March inflation data on Tuesday. The previous figure showed prices rising at a pace of 51.3 percent. The peso is the worst performer in emerging markets this year and the country’s credit-risk premium last week rose to the highest since May 2015
• Indonesia, which has a current-account deficit, reported on Monday a surprise surplus in its trade balance for March at $540 million. India is scheduled to announce trade figures later
• The Philippines on Monday reports February data on remittances, a key source of foreign exchange. Balance-of-payments figures for March will follow on Wednesday.
• In South Africa, March consumer-inflation data is due Wednesday. Governor Lesetja Kganyago reiterated Friday that the central bank wants to see price increases anchored at the 4.5 percent midpoint of its target rate
• Nigeria announces March inflation numbers on Monday, with analysts surveyed by Bloomberg expecting a 11.2 percent reading, still above the central bank’s target though down from a year ago
• Moody’s Investors Service is scheduled to publish a sovereign credit update on Poland on Friday. It rates the country’s debt A2, with a stable outlook

Source: Bloomberg Business News