Emerging-market traders defy August risks to bet on strength

If emerging markets can get through the final week of the month without too many hiccups, some investors might consider July to be a platform for recovery.

The benchmark MSCI stock index has risen 6.6% so far this month, underpinned by advances in Brazil, China and India, while the Hungarian forint and Chilean peso have led a rally in currencies. Brazil and South Africa have just helped drive the Bloomberg-Barclays index of domestic bonds to a fifth week of gains, their best streak since January, while dollar bonds have clocked up a 13th positive week, their strongest performance since 2011.

“Dollar liquidity will continue to provide support, growth data is stabilising and debt-capital market access is available for most credits,” said Paul Greer, a London-based money manager at Fidelity International, which oversees about $566 billion. “We are optimistic on emerging-market currencies in the near term given the weak US dollar backdrop, competitive valuations, low inflation, improving current accounts, recovering PMIs and very light positioning.”

Confidence in emerging markets is being buoyed by unprecedented stimulus efforts by the world’s leading economies, with last week’s approval by European Union leaders of a 750 billion-euro ($874 billion) recovery fund providing the latest spur. The Federal Reserve will probably signal more accommodation ahead when they meet July 28-29. Lawmakers in the US are trying to hammer out another round of pandemic relief before current support expires at the end of this week.

Risks to the rally abound, however. Never mind that August is rarely a positive month for emerging-market assets, paltry signs of progress in stemming the spread of the coronavirus coupled with fresh twists in the deteriorating relationship between the US and China will suffice to keep traders on the back foot. Tensions continued to simmer over the weekend as Beijing slammed the “forced entry” to its Houston consulate by US personnel and vowed to respond “as necessary.”

Here’s what to watch for in the days to come:

China’s rebound

• China’s industrial profits for June are due on Monday and are expected to remain positive in year-over-year terms. These relatively strong profit readings help justify the performance of Chinese stocks, which are up almost 10% year-to-date despite Friday’s slump
  • On Friday, the July official Chinese PMI data for both manufacturing and services are likely to remain in expansion territory and roughly in line with June readings
  • Despite the strong domestic economic rebound, the yuan has surrendered ground on geopolitical concerns, weakening for the first time in four weeks in the five days through Friday

Colombia easing

• Policy makers in Colombia are expected to reduce interest rates by 25 basis points on Friday and leave the door open for more easing, according to Bloomberg Economics
  • The Colombian peso has been unable to strengthen past its 200-day moving average at around 3,600 per dollar this month
• Chile’s central bank meeting minutes, to be posted on Friday, will probably reiterate the dovish monetary policy outlook
  • The South American nation will also release a slew of data for June on Friday, which may show increasing unemployment and falling retail sales and industrial production, according to Bloomberg Economics. Copper production figures for June will also be released on Friday
• Policy makers in Ghana, Kenya and Angola will probably keep interest rates unchanged this week as they contend with currency weakness and rising consumer prices

Data and events

• South Africa’s consumer price index probably ticked higher in June, data may show on Wednesday, though still staying below the lower limit of the central bank’s target range. That may leave room for more policy easing, though the central bank signalled last week that it was nearing the bottom of its rate-cut cycle
  • The rand is still well positioned to benefit from the global search for yield. Even after last week’s quarter-point rate cut by the South African Reserve Bank to 3.5%, the real rate is still around 1.4%
• Turkey’s central bank will unveil its latest year-end inflation forecast in its quarterly report on Wednesday. Bloomberg Economics predicts a “marginal upward revision” to its projection. At its policy meeting last week, the central bank said price growth may exceed its projections
  • The lira has trailed most of its peers this year
• Malaysia’s trade numbers for June will be released on Tuesday
• South Korea will release June industrial production on Friday, which is expected to improve month-over-month, though remain negative in year-over-year terms as the nation continues to lag Taiwan’s recovery. On Saturday, trade data for the full month of July will be available
• Taiwanese provisional GDP data on Friday is expected to illustrate its superior economic recovery compared to most of Asia with the nation forecast to avoid a contraction
  • That said, the Taiwan dollar’s outperformance versus the Korean won has stalled over the past four months
• Thai June IP, due on Wednesday, is expected to remain deeply in contraction. June’s current account numbers will be released on Friday. Although June tends to be seasonally strong, trade figures for the month were disappointing and any strength may be temporary as the current account takes a vast hit from weak tourism
  • The baht is the biggest loser in Asia in July
• A preliminary reading of Mexico’s second-quarter gross domestic product on Thursday will likely show a sharp contraction compared to a year earlier after economic activity plunged 22.7% in May. Economists surveyed by Bloomberg forecast a 21.2% contraction from a year earlier, which would be the worst ever
• Brazilian unemployment data for June, expected on Wednesday, may show a jump in the jobless rate. Traders will monitor congressional debates on consumption taxes, with interest high for any additional proposals submitted by the government to reform the tax system
• Argentina will continue to work toward a deal with creditors to restructure $65 billion in external bonds. Some strategists say that an accord is just pennies away after the three largest creditor groups teamed up to propose a counteroffer
• Dana Gas PJSC hired Houlihan Lokey for financial advice on nearly $400 million of Islamic bonds due in October, indicating that the UAE energy producer may be facing difficulties repaying debt
• The market remains on alert for the US Treasury report on currencies, as discussed in our previous week ahead