Emerging markets may get tough lesson from Turkey on complacency

Turkey is probably going to remind emerging-markets traders the dangers of complacency this week. It’s a lesson that’s been in the making since May, when investors started to let their guards down and allowed their cautious optimism to morph into a wild search for yield, regardless of the risks.

Murat Uysal, who unexpectedly replaced Murat Cetinkaya as central bank governor earlier this month, will announce his first interest-rate decision on Thursday. While every estimate compiled by Bloomberg assumes a reduction, they range from 50 to 800 basis points. Even so, the lira was the best performer in emerging markets last week, rising 1.1%.

Read: Traders downplaying South Africa credit risk should heed Turkey

“A serious meltdown in the lira last summer started on July 24, when the central bank shocked financial markets by keeping interest rates on hold, confounding expectations of a hike,” Ziad Daoud, the Dubai-based chief Middle East economist at Bloomberg Economics, wrote in a report. “Fast forward exactly one year and one day, and the central bank could trigger another currency crisis with a deeper-than-expected cut,” he said, adding the market is pricing in a 200-250 basis point reduction.

Russia is expected to join the rate-cut conga chain at the end of the week, but a senior official at the central bank downplayed the chances of a return to hefty, half percentage-point reductions. The European Central Bank on Thursday is likely to set the stage for a September interest-rate cut and a possible resumption of quantitative easing.

“Conflicting signals in the global macro environment, with deteriorating macro factors being offset by dovish central-bank rhetoric, make us fairly cautious in our country picks even though the underlying trend is very positive for emerging markets,” said Anders Faergemann, a fund manager in London at PineBridge Investments. While he sees value in owning local-currency bonds as central banks in developing nations follow the Fed in cutting rates, he’s skeptical about further gains in emerging-market currencies as they are “getting to a point where they are cyclically overvalued.”

Every currency has risen since May 17 after concern over global growth spurred the world’s most powerful central bankers to turn dovish. The upward trajectory sent a JPMorgan Chase & Co index that measures implied volatility tumbling to the lowest level since 2014, narrowing the difference in future swings between emerging and developed currencies to the smallest since March 2018.

Cut! Cut! Cut!

  • The median forecast is for a 200-basis-point cut in Turkey’s one-week repo rate, now at 24%, a move that would lower the real rate to a little over 6%. That would still be among the highest in emerging markets. But given President Recep Tayyip Erdogan’s push for lower borrowing costs, the concern is the central bank may opt for an aggressive cut, which could trigger a sell-off in the lira and a pickup in inflation
  • Russia is expected to reduce its benchmark rate by a quarter point on Friday as the ruble outperforms all of its peers this year
  • Hungary’s central bank will probably keep its policy rate unchanged after a small tightening step in June. The next adjustment may come in September, when rate setters will review their stance based on updated economic forecasts
  • In Africa, Kenya and Nigeria are seen holding borrowing costs for now on rising inflation. Angola, which has been easing since last July, will decide on its next move Friday, as it seeks to boost growth after a contraction last year
  • Colombia’s central bank will probably keep its key rate unchanged when it meets Friday amid optimism about recovering growth. The peso led gains among Latin American peers last week

Inflation, trade war impact

  • In Brazil, money managers will on Tuesday watch for another low inflation reading, which could feed expectations that the central bank will make its first rate cut in more than a year. The government may also announce on Wednesday a measure to try to boost consumption
  • After last week’s widely expected rate cut by South Africa’s central bank, the first in more than a year, inflation data on Wednesday will help investors to gauge the direction of monetary policy in the coming months. Data in line with expectations would bolster the market’s confidence in another rate reduction this year
  • South African Reserve Bank Governor Lesetja Kganyago will deliver a public lecture about monetary policy, inflation and sustainable economic growth in Pretoria on Wednesday
  • South African finance minister Tito Mboweni will on Tuesday present funding plans for state-owned power utility Eskom. President Cyril Ramaphosa said in June the government would expedite giving Eskom what it needs to remain solvent
  • South Korea reports preliminary second-quarter GDP data on Thursday after its central bank last week unexpectedly cut its policy rate and lowered growth forecasts. The US-China trade war, China’s own economic slowdown and a slump in the semiconductor sector have sent Korean exports tumbling.
  • Growing tensions with Japan have further dimmed the outlook
  • Export orders from Taiwan and trade figures from Thailand are due on Monday, which will help further shed light on the impact of the prolonged trade war. South Korea presents the first 20 days of export and imports data for July on Monday, too
  • May economic activity data in Argentina, set to be released on Thursday, is expected to offer more evidence that the economy came out of a recession in the second quarter as its currency outperformed regional peers
  • Philippine President Rodrigo Duterte is due to deliver his annual State-of-the-Nation address on Monday. Investors expect him to discuss bills to overhaul the constitution, the drug war and ways to make the economy more competitive. The Philippine stocks last week entered a bull market and the peso in 2019 may end a six-year losing run
  • The International Monetary Fund will probably justify central banks’ moves to cut rates when it updates its forecasts for the global economy on Tuesday. In April it forecast growth of 3.3% this year, the weakest since 2009
  • Second-quarter US GDP due Friday is forecast to slow to 1.8%, the weakest pace since early 2017
    Lebanese bonds may rise after parliament passed an overdue, deficit-cutting 2019 budget

© 2019 Bloomberg L.P.

Source: moneyweb.co.za