China to set tone for emerging markets smarting from yield fever

China returns Monday from a week-long holiday during which emerging markets got pummelled as US Treasury yields climbed to a seven-year high.

The People’s Bank of China announced over the weekend it would cut the amount of cash lenders must hold as reserves for the fourth time this year as part of efforts to bolster the economy amid the continuing trade dispute with the US The offshore yuan weakened past 6.90 per dollar last week. Data on Sunday showed the nation’s foreign-currency holdings fell in September.

Events in Brazil and Turkey are also likely to keep traders busy this week. The real’s implied volatility was at a four-year high Friday as Brazilians prepared to vote in Sunday’s presidential election first round. Turkey is due to publish current-account data Thursday, with many economists forecasting a record surplus, while the next hearing into a detained American pastor — the cause of a diplomatic spat with the US — is scheduled for Friday.

Treasury 10-year yields rose the most since February last week as stronger US data added to the case for reduced stimulus measures from the Federal Reserve. Emerging-market stocks tumbled 4.5% in the five days through Friday, their worst performance since February, while currencies and domestic bonds dropped the most since August.

“The dollar’s rally will likely continue,” as the Fed will likely extend its policy of gradual interest-rate increases at least through the end of 2019, said Richard Segal, a senior analyst at Manulife Asset Management in London. “That and the US bond market reaction will weigh on emerging markets, especially the local-currency market. Keep to the higher-quality credits in the dollar markets and keep shorter durations.”

All eyes on China

The central bank lowered the required reserve ratio for some lenders by 1%age point, effective Oct. 15 The cut will release a total of 1.2 trillion yuan ($175 billion), of which 450 billion yuan is to be used to pay maturing medium-term funding facilities.

It gives the market a stronger easing signal and can support sentiment, which has been negative on China and emerging markets in the past few days, said Wang Tao, head of China economic research at UBS Group AG in Hong Kong “Chinese policymakers appear to favour a stable yuan for the time being,” Goldman Sachs Group strategists including New York-based Zach Pandl wrote in a report on October 5.

“Despite an imperfect domestic economic picture, we see our 3-month USD/CNY forecast of 6.9 as appropriate for now.”

The country’s trade balance will also be a focus on Friday after “softer PMIs in China at the beginning of the month raised nerves around the impact that the trade war was having,” Australia & New Zealand Banking Group analysts including Sydney-based Daniel Been wrote in a note.

Bolsonaro versus Haddad

Brazil’s election results are due late Sunday with right-wing candidate Jair Bolsonaro leading polls, though most observers doubt that he will win outright in the first round. Bolsonaro is expected to face a run-off against Workers Party candidate Fernando Haddad The real’s one-week implied volatility rose 85% last week to 35.57% on Friday, the highest closing level since 2014.

The pastor’s fate

A local court could free Andrew Brunson, currently under house arrest in the Turkish coastal town of Izmir, when he appears for a hearing on October 12, the Wall Street Journal reported last month, citing officials it didn’t name. His arrest has exacerbated the lira’s depreciation as US-Turkish relations soured.

“There had been signs of a cooling of tensions in recent weeks, including suggestions that Pastor Brunson will be released,” William Jackson, chief emerging-markets economist at Capital Economics in London, wrote in an October 5 report. “Anything that comes out of the hearing that dents hopes for a swift resolution to the skirmish could place the lira under further pressure.”

Turkey will probably announce on Thursday its current account swung to a surplus of $2.5 billion in August, from a deficit of $1.75 billion in July, according to the median estimate of economists. That would be a record monthly surplus, according to Bloomberg data going back to 1984 Treasury and Finance Minister Berat Albayrak said over the weekend that the economy has started to re-balance and that public and household debt ratios in Turkey are healthy, state-run Anadolu Agency reported.

India inflation

Close attention will be paid to inflation figures due Friday after India’s rupee completed its sixth weekly decline against the dollar that left it a fresh all-time low. Policy makers surprised markets Friday by standing pat on interest rates. The Reserve Bank of India left its repurchase rate at 6.5%, while changing the stance of monetary policy from neutral for the first time since February 2017 to “calibrated tightening”.

IMF meeting

Central bank chiefs from Brazil, Mexico, Colombia, Peru and Chile are due to attend the International Monetary Fund’s biannual meeting starting Wednesday in Bali, Indonesia. Among likely attendees is Argentina’s Economy Minister Nicolas Dujovne, who helped negotiate a record $57 billion credit line from the IMF this year. The Argentine peso gained last week, but remained 51% weaker this year.

South African rating review

Moody’s Investors Service is due to review South Africa’s credit ratings on October 12, though the company has said it may delay any action until after mid-term budget on October 24. It changed its outlook to stable from negative in March, making a downgrade less likely Data on business confidence, mining production and manufacturing may give clues to the outlook for the economy after a first-half recession The rand has been the worst performer among peers this month Elsewhere, both S&P and Fitch are set to present their ratings update for Poland on Friday. The companies have positive and a stable outlooks on the nation’s rating, respectively

Peru rate decision

Peru’s central bank is expected to hold its benchmark rate for a seventh month on Thursday; low inflation and a drop in metals prices are likely to influence the decision; policymakers trimmed their GDP forecast for 2019, making a rate hike anytime soon unlikely. The Peruvian sol fell last week. Israel and Serbia will also decide on monetary policy.

Other data

Investors in Hungary will focus on September inflation data due on Tuesday for confirmation that price growth is peaking, with the central bank expecting a slowdown in inflation into the year-end to support its pledge to keep financing conditions loose Egypt will announce CPI on Wednesday; the central bank is set to keep rates unchanged in 2018, even with inflation within target “amid weak financial-market sentiment towards emerging economies,” Standard Chartered said in a report South Korea announces current-account data for August on Thursday and September unemployment rate on Friday. The Philippines releases trade data for August on Wednesday.

� L.P