Trade gives emerging markets rest from dealing with list of woes

The threat of US sanctions against Turkey. Political turmoil in Peru and Ecuador. Election risks in Poland and Hungary. A change of direction at South Africa’s Eskom.

The list of worries hanging over emerging markets is about as long as it’s been at any time this year. Yet it’s a measure of the current mindset that trade, rather than any or all of those idiosyncratic concerns, will be the biggest focus this week as Friday’s partial agreement between the US and China provides a moment of comfort.

The relief might still be fleeting. Apart from the many unresolved issues in the negotiations, China’s own economic performance will be at the forefront of investor concerns. Though some economists say data on Friday will show Chinese growth slowed to below 6% in the third quarter — a likely trigger to a selloff across emerging markets — the median forecast is still 6.1%.

“China’s economic stabilisation is more important than the partial trade deal –- it provides some support to EM markets and lessens China’s motivation for a broader trade deal with the U.S,” James McCormick, global head of strategy at NatWest Markets Plc in London, wrote in a report. “The message will be an economy that continues to slow but is stabilising on the back of targeted stimulus efforts.”

One-month options on Friday showed the biggest drop in bearish wagers against the offshore yuan since April. China released on Monday figures showing exports and imports shrank more than expected in September. Its inflation data are scheduled on Tuesday. Industrial production and retail sales numbers are also due on Friday.

Vulnerable lira

The lira is likely to remain under pressure following its biggest weekly drop since March.
The currency’s implied volatility jumped by the most among peers last week as Turkey’s offensive in northern Syria heightens the risk of sanctions.

Traders also appear to be scaling back wagers for further interest-rate cuts, with the one-year cross-currency swap jumping 175 basis basis points, the most since May, to almost 15%.

President Donald Trump said the US “Treasury is ready to go” if additional sanctions are needed on Turkey, without providing a specific timeframe.

Eskom anxieties

It’s a big week for Eskom, the state-owned electricity company that Goldman Sachs described as the biggest risk to the country’s economy. A policy paper on a restructuring plan for the utility will be presented to President Cyril Ramaphosa’s cabinet. Investors expect the plan to include proposals on how to deal with the company’s R450 billion of debt

Options traders are the least bearish on South Africa’s rand since April last year, according to one-month risk reversals

Read: Five key things to watch for as SA acts to fix Eskom

Poland and Hungary vote

Poland will on Monday wake up to exit poll results from Sunday’s parliamentary elections showing the ruling nationalists are headed for another four years in power. Official results are expected by Tuesday.
The central bank will release current-account data on Monday and the statistics office will announce inflation figures Tuesday.

In Hungary, opposition parties had an unexpected strong showing Sunday in local elections, particularly in the capital Budapest, which could give them momentum for the 2022 parliamentary election; Orban’s party has won seven back-to-back nationwide contests.

The ruling party was hurt by a video showing one of Prime Minister Viktor Orban’s allies rollicking in an orgy on a luxury yacht.

Data and decision

Policy makers at the Bank of Korea meet on Wednesday to decide whether to go ahead with a second rate cut this year.

BOK Governor Lee Ju-yeol told parliament he wasn’t confident the economy can achieve the central bank’s growth target of 2.5% for 2020 amid a global deceleration and a cooling of demand for technology products. At 1.5%, South Korea’s key rate is just 25 basis points from a record low.

Argentina’s September inflation data will be closely watched Wednesday for any spike in prices after the collapse in the peso the previous month.

Presidential debates ahead of the October 27 vote may also weigh on markets, with the opposition widely expected to win a comfortable majority.

Peru will publish economic activity data for August on Tuesday, with analysts surveyed by Bloomberg forecasting the fastest growth this year.

The sol is among a handful of emerging-market currencies that have risen this year.

In Colombia, manufacturing and retail sales growth both probably slowed in August, Tuesday releases are expected to show. The nation’s trade balance for the same month, to be published Friday, will probably show a larger deficit than a year ago, according to Bloomberg Economics.

The Colombian peso rose over the past week, though it’s still down year-to-date.

© 2019 Bloomberg L.P.