Good news and bad news make emerging markets a short-term long

The bad news is the Chinese data showed the slowest rate of expansion in almost three decades. The good news is the 6.2% reading was no worse than forecast. And it was this, perhaps coupled with better-than-expected factory and retail sales numbers and some encouraging corporate earnings news, that buoyed the country’s stocks — and indeed emerging markets in general. The MSCI index jumped as much as 0.4% as the Shanghai Composite Index rebounded from its worst week in two months, currencies were mostly stronger and average yield spreads on sovereign dollar bonds were one basis point narrower versus Treasuries.

Short-term long

The logic from here is that as the world’s biggest central banks, led by the Federal Reserve, become more accommodative, policy makers in the emerging markets will be more minded to follow suit — and decisions this week from Indonesia, South Korea and South Africa may bear that out. From there, it becomes a question of how quickly the grey clouds of slowing growth send investors scurrying back to the shelter of the dollar. Stuart Ritson, who helps manage Aviva’s Emerging Markets Local Currency Bond Fund in Singapore, says that moment may be only a month or two away. While entering carry trades favouring the Mexican peso, Russia ruble and Polish zloty in recent weeks, he says it’s a tactical play that the $440 billion investment firm doesn’t expect to hold for long.

Trouble for ruble?

If Jaroslaw Kosaty is right, Aviva may want to revoke that view on the ruble sooner rather than later. Kosaty, a strategist at Poland’s PKO Bank Polski in Warsaw who was the most accurate forecaster for the ruble in the second quarter, says the Russian’s currency’s world-beating rally this year is headed for the buffers. Taking a position that makes him more pessimistic than any of his peers, he says much of the good news on Russia is priced in and the negative effects of impending rate cuts from the central bank are likely to outweigh anything the Fed does. For what it’s worth, the Russian currency was among the winners today, taking its advance this year to 11%. But Kosaty expects that annual gain to have largely evaporated by year-end.

The losing won

Drilling deeper into this week’s Asian rate decisions, David Finnerty, one of Bloomberg’s Seoul-based foreign-exchange reporters, says the won is the more vulnerable to policy easing. Though a rate reduction from the Bank of Korea isn’t a foregone conclusion, the largely tech-driven economic slowdown and unseemly trade spat with Japan will force its hand before long. And since Korean 10-year bonds yield just 1.57%, more than five percentage points lower than Indonesia for example, this is where the most Asian pain could show up in the weeks ahead. Note that the won couldn’t make any headway today even as most of its Asian counterparts were in the green. The rupiah, meantime, was the day’s emerging-market star, appreciating as much as 0.6% to a five-month high.

Erdogan’s pledge

Turkey got cut deeper into junk by Fitch on Friday, but the company’s assessment still leaves it a step above the grades the country has at Standard & Poor’s and Moody’s. So the impact on the country’s assets has been predictably minimal, with the lira and Turkish bonds behaving placidly early Monday. More meaningful was President Erdogan’s pledge yesterday to lower interest rates and inflation by the end of the year, which throws all the attention on the July 25 rate decision under the auspices of new central bank Governor Murat Uysal. Meantime, investors are betting the hullabaloo over Turkey’s purchase of a Russian missile system — parts of which have started arriving — will turn out to be overblown following President Trump’s softer tone on the issue last month. The US, which will have to be seen to do something to punish its Nato ally, is said to be considering several options.