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Emerging Markets Defy Risks with Turkey Taking Center Stage


Emerging Markets Defy Risks with Turkey Taking Center Stage


(Bloomberg) — Even with the U.S. election out of the way, investors could be forgiven for taking a cautious view of emerging markets, given the wall of risks ahead for the world’s developing economies.

Yet the continued spread of the coronavirus, debt troubles at Chinese state-owned firms and rumbling political tension from Thailand and Turkey to Brazil and Peru are doing little to dissuade the bulls. Underscoring the market calm, measures of implied volatility for currencies and stocks declined for a second week in the five days through Friday.

Quickening growth in developing nations, progress toward the development of a vaccine and unprecedented stimulus are underpinning investor optimism, driving currencies and stocks to two-year highs. Bank of America Corp. says the recovery’s just getting started, while Morgan Stanley predicts a “sharp rebound” predicated on a widening U.S. current-account deficit, low real rates in the U.S., dollar depreciation, China’s reflationary impulse and accommodative macro policies. Goldman Sachs Group Inc. cites easing trade tensions as a major tailwind.

“The combination of easy money and vaccine is too powerful and markets have a longer-term horizon than a few months,” said Kit Juckes, London-based chief currency strategist at Societe Generale SA. “The central-bank message is that monetary policy will remain as accommodative as possible and we should expect further easing over the winter. At some point, that is going to revive risk sentiment.”

Weekend events have added to the favorable backdrop. Asia Pacific nations including China, Japan and South Korea on Sunday signed the world’s largest regional free-trade agreement. And President Donald Trump briefly acknowledged for the first time that he lost the election, easing concern he will push ahead with attempts to reverse the result.

Turkey’s central bank meeting Thursday under new Governor Naci Agbal will likely be the most closely watched event in emerging markets this week. With investors bracing for a return to a more orthodox, market-friendly approach, a disappointing outcome could send the lira reeling again.

Turkey Hike Wanted

  • Central-bank Governor Agbal is expected to raise the one-week repo rate by 475 basis points at his first meeting, which would be Turkey’s biggest hike since September 2018
  • An overhaul of the nation’s economic leadership saw the lira rally more than 11% against the dollar in the five days through Friday, its best week in almost two decades
  • President Recep Tayyip Erdogan vowed to start a period of economic and legal reform after the replacement of both the central bank chief and his son-in-law as finance minister
  • Read: Turkey Central Bank Chief Said to Promise Greater Visibility

Those on Hold

  • The Bank of Thailand’s first meeting under its new Governor is expected to leave rates unchanged on Wednesday
    • However, Sethaput Suthiwart-Narueput faces calls from the government to stall appreciation of the baht, which has risen 3% this month, partly as optimism over tourism has surged in light of vaccine developments
    • Inflows into Thai sovereign debt climbed to the highest in 17 months in November, attracted by the promise of currency appreciation
    • Read: Funds Rush Into Thailand Bonds in Vaccine Play: SEAsia Rates
  • Bank Indonesia is also expected to leave rates unchanged on Thursday by the majority of analysts
    • However, with the rupiah the strongest Asian currency since the U.S. election, a minority — including Bloomberg Economics — expect the central bank to cut
  • The Philippine central bank is expected to stand pat on Thursday, although there is a small chance of a cut after the central bank governor pledged to consider the “disappointing” third-quarter growth data at the policy meeting
    • The Philippine peso was almost unchanged last week as markets were disrupted by a typhoon
  • The South African Reserve Bank will probably keep its benchmark interest rate on hold at 3.5%
    • “Renewed lockdowns in advanced economies may dampen the expected improvement in economic activity,” Bloomberg Economics said. “This may justify another cut in interest rates, but we see the risks as already accounted for in the SARB’s aggressive frontloading of rate reductions to date”
    • The rand has been the top gainer in emerging markets in the past month
  • Hungary’s inflation rate fell for a second month in October, easing pressure on the central bank to lift interest rates on Tuesday along with a rally in the forint
  • Zambia’s central bank will announce on Wednesday its first rate decision with a new governor in place after the nation became the first in Africa to default on its foreign debt since the pandemic struck. Officials may keep policy unchanged as they seek to shore up Africa’s worst-performing currency this year

Data and Events

  • China’s October industrial production is expected to continue its impressive rebound on Monday
    • Retail sales are likely to continue closing the gap in performance with production, although the longer-than-usual October holidays may have been a factor in lifting consumption
    • Fixed-asset investment should also continue to pick up
    • The yuan was among the worst-performing currencies in emerging Asia last week, underscoring concern about parting shots from the outgoing U.S. administration
  • Thailand is likely to report a year-over-year contraction in third quarter gross-domestic product on Monday
  • Indonesia should announce another strong trade surplus for October on Monday as imports continue to contract
    • Current-account numbers for the third quarter will be released on Friday
  • Philippines remittances data for September are scheduled for Monday
  • Taiwan’s October export orders are expected to produce another strong showing on Friday
    • The U.S.’s Economic Prosperity Partnership Dialogue with Taiwan will take place in Washington on Friday. Taiwanese officials have expressed hope that a memorandum of understanding on trade relations can be issued
    • Late losses continue to erase intraday Taiwan dollar gains
  • Investors will be watching to see if Peru’s political turmoil and social unrest spill over into the markets after the impeachment of former President Martin Vizcarra
    • A reading of third-quarter GDP on Friday is expected to show signs of a recovery after a deep contraction in the second quarter, according to Bloomberg Economics
  • Chile will probably signal further economic recovery when it releases third-quarter GDP results on Wednesday, though output remains far below pre-pandemic levels, according to economists surveyed by Bloomberg
    • Traders are also watching the advance of a bill through the Chilean Senate that would allow a second early withdrawal of pension savings
  • In Brazil, money managers will want updates on the economic reform agenda once the Nov. 15 municipal elections pass
    • The nation is scheduled to release its October tax-collection data this week
  • Colombia’s GDP probably fell less in the third quarter than it did in the second, data on Tuesday is expected to show
    • A reading of September economic activity on the same day will probably flag another contraction from a year earlier, according to Bloomberg Economics

©2020 Bloomberg L.P.

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