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Abu Dhabi, UAEMonday 10 December 2018

Emerging markets outlook: developing economies show resilience 

Traders look to the performance of the US dollar and US rates for clues of what's to come

Hundreds protest in support of the truck drivers' strike and for military intervention against the Government, at the Paulista Avenue in Sao Paulo, Brazil. The strike has caused an impact to the country's economy and an increasing shortage of all kinds of products. Fernando Bizerra Jr / EPA
Hundreds protest in support of the truck drivers' strike and for military intervention against the Government, at the Paulista Avenue in Sao Paulo, Brazil. The strike has caused an impact to the country's economy and an increasing shortage of all kinds of products. Fernando Bizerra Jr / EPA

For all the concern that there’s a crisis brewing in some developing economies, emerging markets are showing resilience going into the final week of May, thanks to the dollar’s recent pause and a drop in US yields.

That may all change should Friday’s payrolls data fan speculation that the Federal Reserve will accelerate the pace of interest-rate increases. But Turkey apart, investors are saluting a week in which emerging-market currencies had their biggest gain since March and local-currency bonds strengthened for the first time in seven weeks as US 10-year yields slipped back below 3 per cent. Still, stocks extended the previous week’s losses.

“The key driver for emerging markets will continue to be exogenous factors, in particular the performance of the US dollar and US rates, which have been key headwinds for our asset class in recent weeks,” said Paul Greer, a London-based portfolio manager at Fidelity International.

Purchasing managers’ indexes from across emerging markets will provide clues on the health of the global economy and influence policy makers’ thinking. Investors will also closely watch how central banks will respond to any return of currency weakness.

The lira was the world’s best-performing currency on Monday after Turkey’s central bank announced changes that sought to simplify its monetary policy. It said it would start using the one-week repo, which hadn’t been used as its main funding tool since January 2017, as its policy rate starting June. The central bank’s unscheduled 300-basis point increase to its main rate -- the late-liquidity window -- last week had failed to support the currency for long. Turkey is scheduled to release trade balance data on Thursday.

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The rupiah also advanced after Indonesia’s new central bank governor, Perry Warjiyo, set the stage for a second interest rate increase in two weeks at an early policy meeting called for Wednesday. He said the out-of-cycle meeting is a pre-emptive step ahead of the Fed’s next policy decision on June 14.

Elsewhere, Central European rates and currencies, especially Poland’s and Hungary’s, won’t be immune to the pressure on European peripheral debt, Fidelity’s Mr Greer said.

“If markets stabilise, you may see investors get a little more optimistic and try to jump in to pick up some values,” said Eric Stein, a Boston-based co-director of global income at Eaton Vance, which manages $430 billion of investments. “If things keep selling off, investors may get even more skittish.”

What is to come

• China, the largest emerging market, will release its manufacturing PMI for May after some data this month indicated economic momentum in the Asian nation broadly held up in April. Manufacturing PMI may come in at 51.4 in May, according to a Bloomberg survey of economists. The yuan has been the best EM performer in Asia this year after Thailand’s baht.

• Brazil, Mexico, Taiwan will also release PMI data.

• Brazil, Croatia, Czech Republic, India, Poland will unveil GDP reports.

• Poland, Peru, South Korea, Thailand to announce CPI.

• In South Africa, data on money supply, credit growth and producer-price inflation may provide clues on the outlook for monetary policy. Reports on the trade balance and manufacturing may shed light on the health of the economy. The rand had its best week since February as traders weighed a more hawkish policy.

Ongoing tensions

• Investors will watch for any further development between the US and North Korea; President Donald Trump appeared to confirm in a tweet on Sunday that his summit with Kim Jong-un was back on, three days after he abruptly called off the historic meeting in an sharply worded letter to the North Korean leader.

Negotiations Everywhere in Latin America

Latin American observers will be focused on a slew of important negotiations this week involving the region’s three largest economies - Brazil, Mexico and Argentina.

• In Brazil, the senate is expected to vote on Tuesday on whether to turn into law payroll and diesel tax breaks announced by the government last week as part of talks to end a trucker strike that has caused fuel shortages, flight cancellations and even triggered some supermarkets to limit purchases. Truckers say the initiative must become law in order for them to call off the strikes, which continued even after the government announced a deal to halt them. Investors are assessing how the fuel tax breaks would impact an already fragile fiscal backdrop and companies like the state-controlled oil giant Petroleo Brasileiro.

• Mexican officials will fly to Washington this week to try to strike a deal on Nafta amid pressure from the US over possible auto tariffs. Mexican investors will also get guidance from the central bank with the release of minutes from the last meeting, when benchmark rates were kept unchanged. Emerging-market central banks have been pressured to step up efforts to protect their currencies given the recent rout.

• Argentine authorities, meanwhile, are set to continue negotiating a credit line from the International Monetary Fund. They’re said to be seeking a “rapid” conclusion.

• In Colombia’s first round of its presidential election on Sunday, Ivan Duque, an investor-friendly lawyer whose campaign against a peace accord with Marxist guerrillas has divided Colombians, took first place. In a June 17 runoff he will face former guerrilla Gustavo Petro, who got 25.1 per cent, presenting voters with a stark choice.