Traders across the world may be coming around to the idea that the U.S. election isn’t going to be the tumultuous event it was once expected to be. But the real believers seem to be in emerging markets.
Optimism that the November election result will go uncontested and speculation that a U.S. stimulus package will have to be agreed whatever the outcome are damping concern about fluctuations through year-end. Yet, while U.S. VIX futures declined last week as bets on likely price volatility eased, the drop was slower than for emerging markets.
“It does appear that emerging-market investors are slightly more sanguine about risks through the end of the year than what you’re seeing in developed markets,” said Nick Stadtmiller, a New York-based strategist at Medley Global Advisors. “As long as global liquidity remains ample, and as long as global markets at least hold their ground, I would expect emerging-market assets to perform well. Yields on many emerging-market assets are high, especially relative to rock-bottom yields on developed market assets.”
Falling volatility may give investors more confidence to put cash into an asset class enjoying one of its best phases since the virus-induced global sell-off in March. Citigroup Inc. said last week the worst is over for developing-nation assets and Morgan Stanley is betting volatility will continue to ease as the outcome of the November vote becomes clearer.
Emerging-market equities and currencies climbed to an eight-month high on Friday, while local-currency debt had its best week since May on the prospect of U.S. fiscal stimulus. One-month implied volatility on the Brazilian real, South African rand and Russian ruble fell by the most among peers last week, signaling improved appetite for risky assets.
“The markets are positioned themselves for a fresh dose of fiscal stimulus and former VP Biden winning the election and on the top of that Democrats regaining control over Senate,” said Piotr Matys, a London-based strategist at Rabobank. “Even if there is no agreement ahead of November 3, the markets know that it is just a matter of time when a fiscal package will be implemented.”
Rate Decisions
- Bank Indonesia’s rate decision comes on Tuesday. Consensus heavily favors no change as the central bank seeks to protect the rupiah. However, the acute need for domestic stimulus, plus the fact that headline inflation has been below the central bank’s target range for five months may mean that a cut is considered
- The rupiah appreciated by more than 1% last week, and is currently comfortably stronger than the central bank’s perceived stress point of 15,000
- On Thursday, Indonesia reports September trade numbers. A continuation of the Covid-induced import slump should keep the trade account in surplus
- The Bank of Korea meets on Wednesday and is unanimously expected to stand pat. With rates close to the effective lower bound, the hurdle to further easing is high
- Korean won 1-month NDFs posted Asia’s strongest performance last week as odds shifted more decisively toward a Joe Biden election victory and yuan appreciation spilled over
- The Monetary Authority of Singapore meets on Wednesday. Consensus expects no change
- In much of the Asian region, central bank intervention decisions are influenced by the trade-weighted exchange rate and the economic cycle
- Thus MAS’s forward-looking policy setting approach can influence perceptions of the most highly cyclical Asian currencies –- like the won, Taiwan dollar, Malaysian ringgit and Thai baht
- Chile’s central bank is expected to keep its key interest rate at 0.50% on Thursday, without announcing new quantitative easing measures, according to Bloomberg Economics. The peso was the best-performing emerging-market currency in the third quarter, according to data compiled by Bloomberg
- Uganda will also decide on monetary policy on Thursday and Sri Lanka on Friday
- Cheaper to Short
- China’s policy makers acted to restrain a rally in the yuan by removing rules that made betting against the currency expensive
- Financial institutions will no longer need to set aside cash when purchasing foreign exchange for clients through currency forwards, effective from Monday, the People’s Bank of China said over the weekend
- The yuan reopened with a bang in the onshore market on Friday, with a stronger-than-expected official fixing, following the Golden Week holiday. It closed at about 6.69 per dollar, its strongest level since April 2019
- China’s trade data will be released on Tuesday. The healthy trade surplus has been part of the strong yuan story, and consensus forecasts predict another 10% year-over-year increase to leave the surplus near $60 billion
- Inflation data are due on Thursday. The headline rate is expected to dip below 2% year-over-year for the first time since February 2019
- Monetary data are due sometime in the week. Aggregate financing is expected to show a slowdown from the rapid clip last month
Economic Data
- Malaysia announces August industrial output on Monday. Consensus expects a drab outcome of close to zero year-over-year
- Ringgit enjoyed modest gains of around 0.4% last week
- On Monday, India releases September CPI data
- The outcome is expected to remain above the Reserve Bank of India’s 6% year-over-year tolerance for the sixth consecutive month. This has prevented the RBI from making the interest rate cuts the economy needs, and has apparently increased their tolerance for rupee appreciation
- Industrial production for August is also due Monday, and is expected to show a continued steep year-over-year decline
- September trade balance will be reported Thursday
- The rupee was stable last week, making it Asia’s laggard after the central bank on Friday signaled more policy easing ahead and announced a slew of liquidity steps to support an economy it sees contracting 9.5% this fiscal year. The Monetary Policy Committee retained the benchmark repurchase rate at 4%, as expected, while keeping its policy stance accommodative, implying it could ease again
- The Philippines’ remittance growth numbers for August are scheduled to be released on Thursday. Consensus expects growth of roughly 5% year-over-year
- The peso’s 0.3% gain last week was the second least among emerging-Asian currencies
- Turkey reports the current-account balance for August on Monday, followed by industrial production Tuesday
- The lira is the worst performer in emerging markets this month, even after the central bank unexpectedly hiked its one-week repo rate by 200 basis points in September and authorities unwound a slew of trading restrictions on the currency
- Azerbaijan and Armenia continued to report violations of a Moscow-brokered cease-fire, although major military engagements appeared to remain on hold Sunday
- Poland presents its August current-account balance on Wednesday, followed on Thursday by the flash CPI reading for September, and by last month’s core CPI print on Friday
- Russia may report year-to-date budget balance; also September industrial production, producer prices on Thursday and Friday
- South Africa has August manufacturing and mining production Monday and Tuesday, followed by retail sales Wednesday and second-quarter non-farm payrolls Thursday
- A reading of Argentina’s September inflation, scheduled for Wednesday, will probably show an annual decrease, according to economists surveyed by Bloomberg. The nation is also expected to release budget balance data this week. Bloomberg Economics recommends watching the central bank as it tries to stem the depletion of international reserves
- Mexican industrial production data for August, to be released on Monday, will probably flag a decline from a year ago despite a small recovery from earlier in 2020
- The Mexican peso has outperformed all of its peers this month as investors bet that increased stimulus under a Biden presidency will help boost Mexican exports to the U.S
- In Brazil, investors will watch August economic activity figures on Thursday for signs of a rebound in gross domestic product in the third quarter. The nation may also slow debate over the government’s new social program and spending cap until after local elections in mid-November
- The real was the biggest gainer in emerging markets last week
- A reading of Peru’s August economic activity gauge on Thursday will probably flag an even deeper contraction than a month earlier, according to economists surveyed by Bloomberg
- Colombia is expected to post retail sales numbers on Thursday that may give money managers more insight into the nation’s consumer appetite amid the pandemic
