Countdown to Election Tests Emerging-Market Bulls’ Resilience

LAGOS (Capital Markets in Africa) — This month’s emerging-market rally is showing signs of faltering as investors refrain from placing big bets in the final two weeks of the U.S. election campaign.

Even as Democrat Joe Biden has widened his lead over President Donald Trump in recent polls, a Bank of America Corp. survey showed global fund managers expect the outcome to be contested and are ready for extreme market turbulence. While growing odds that Democrats will take control of the White House and the Senate have boosted wagers for a weaker dollar and gains in developing-nation assets, this “comfortable consensus” in the market could unravel if the polls prove to be wrong, according to Fidelity International.

“We expect markets to remain choppy into the U.S. election, with liquidity likely to get thinner every day as we approach 3rd November,” said Paul Greer, a money manager in London at Fidelity International, which oversees about $566 billion. “Popular pre-election positions will likely get squeezed and conviction tested.”

“Our mindset is to wait for the event to play out and trade the price action afterward,” Greer said.

While all eyes will be on the final presidential debate between Trump and Biden on Thursday, a spate of country-specific events this week will also divert investors from their obsession with the U.S. election. Turkey is set to hike its policy rate again after surprising markets with an increase in September. In Russia, even though the majority of economists expect the central bank to leave its key rate unchanged on Friday, Bloomberg Economics says it won’t rule out a quarter-point reduction.

On the data front, China’s third-quarter gross domestic product numbers showed that its economic recovery gathered pace, despite disappointment relative to consensus. Elsewhere, Zambia needs to convince reluctant bondholders to accept an interest-payment holiday before a key vote on Tuesday while it works out a debt-restructuring strategy.

Gauges of developing-nation stocks, currencies and bonds were little changed in the five days through Friday following their two-week rally as delays to a U.S. fiscal stimulus package and setbacks in Covid-19 vaccine trials reduced risk appetite. Speaker of the House Nancy Pelosi set a Tuesday deadline for more progress with the White House after lengthy discussions at the weekend with Treasury Secretary Steven Mnuchin.

Rate Decisions
Turkey is seen raising its policy rate to 11.75% on Thursday, according to economists’ median forecast

The Turkish central bank has continued to lift interest rates by stealth, forcing lenders to borrow at higher rates. The average cost of funding from the central bank has risen to 12%, effectively unwinding all of this year’s rate cuts. At 10.25%, the repo rate now lags the average cost of funding from the central bank, making another hike more likely, according to Bloomberg Economics
The lira has trailed all of its peers this month even after the central bank unexpectedly hiked its one-week repo rate by 200 basis points in September

While a slide in the ruble is likely to keep the Bank of Russia on hold on Friday, there is potential for one more quarter-point reduction given the resurgence in the virus and evidence of soft underlying price pressure, according to Bloomberg Economics

Hungary’s central bank will probably keep rates unchanged at its monthly policy meeting on Tuesday, despite the forint’s slump. Inflation has slowed toward the authority’s target, expanding room to maintain loose financing conditions

Ukraine will announce its key policy rate on Thursday amid rising uncertainty over its independence, cooperation with the International Monetary Fund and a virus spike
Israel, Sri Lanka, Mozambique, Namibia, and Uganda will also decide on monetary policy this week

China’s Recovery
Gross domestic product climbed 4.9% in the third quarter from a year ago, according to data released in Beijing Monday. That’s lower than economists forecast, but faster than the 3.2% expansion seen in the second quarter

Market disappointment was offset by significant beats for September industrial production and retail sales

China is expected to keep its prime rates unchanged Tuesday after it injected more liquidity into the system last week through a medium-term lending facility auction

The yuan’s long run of appreciation stalled after the central bank liberalized rules on buying currency forwards and traders became concerned the authorities had encouraged a slide in the spot rate before the 4:30 p.m. closed Monday last week. However, a strong close on Friday and an in-line fixing today were reassuring for bulls

Zambia Showdown
The southern African nation has a 30-day grace period to make the interest payment it missed last week before a default event occurs, which would allow bondholders to demand immediate repayment of the principal

The government has called on private creditors to agree to a deferral of payments at an Oct. 20 meeting, but a group that holds about 40% of Zambia’s $3 billion in outstanding Eurobonds has already said it won’t support the proposal

Data and Events
Thailand’s new central bank Governor Sethaput Suthiwart-Narueput is due to attend his first media briefing on Tuesday. Investors will be alert to comments from the new governor about quantitative easing, his assessment of the effective lower bound for policy rates, and the threat posed by a strengthening baht. Political developments may stay in focus following an escalation in protests and the imposition of a state of emergency. Thailand will release trade data on Thursday. The baht was the second-worst performing currency in Asia last week with political concerns contributing to its underperformance.

Taiwan’s September export orders should show a continued recovery when they are released on Tuesday. Industrial-production figures for the same month, to be published Friday, are also forecast to confirm the upward trend. The Taiwan dollar maintained its pattern of weakening toward the close of trading, fueling speculations the central bank is seeking to slow its appreciation
South Korea will release 20-day export data for October on Wednesday. Fewer working days in the period compared with a year earlier are likely to cause the headline number to contract, concealing a relatively healthy underlying trend. The won was the strongest Asian currency last week.

Malaysia’s CPI numbers, due on Wednesday, are expected to show prices fell for a seventh month in September. The nation 10-year bond yields fell seven basis points last week as it continued to attract foreign inflows. Moody’s is set to review Romania’s credit score on Friday, the first of three assessments from the major rating firms that all keep the nation at the lowest investment-grade score with a negative outlook.

U.S. Treasury Secretary Steven Mnuchin is visiting the Middle East this week, his first trip since the pandemic, with plans to travel to Israel, Bahrain and the United Arab Emirates. Investors will monitor Mexican unemployment figures for September, to be posted on Wednesday, for signs of how the economy is faring amid the pandemic. Inflation data for the first half of October will probably flag a peak, supporting expectations for a slowdown in the fourth quarter and in 2021, according to Bloomberg Economics.

August retail sales, to be released on Friday, may also offer signs of how the pandemic is affecting consumer habits. Argentina’s economic activity data, scheduled for Thursday, may show signs of a slow pickup in August as industrial production increased, according to a forecast by Bloomberg Economics. Further announcements by the central bank or economic team on the currency or rates will also drive sentiment. Argentina will change course on capital controls for the parallel foreign exchange rate, Economy Minister Martin Guzman said, without being more specific.

Colombian economic activity data for August, expected on Thursday, will probably slip from a month earlier as the pandemic lingers. Brazil’s mid-October inflation reading, scheduled for Friday, may show another uptick due to a surge in food prices, according to Bloomberg Economics. Investors will also watch September’s current account balance figures, to be released on Friday
In Chile, the focus will be on an Oct. 25 referendum on whether and how to rewrite the constitution. Citi recommends waiting until after the referendum to bet on the nation’s equities.

Source: Bloomberg Business News