Traders suddenly dare to believe in an emerging-market rally

It’s a measure of how the climate has changed so quickly for emerging markets that this week’s interest-rate decision in Turkey, an event that would have had traders on tenterhooks six months ago, is being anticipated with a virtual shrug.

Far from encapsulating the vulnerability of the developing economies as it did last year, the lira’s torrid start to 2019 is doing little to take the sheen off the growing sense of recovery seeping through emerging markets.

True, the next development in the trade talks or a flurry of negative economic indicators from China could change everything. But for now the Federal Reserve’s more dovish tone — and central bank largess in general — combined with falling volatility, relatively low valuations and rising commodity prices are keeping most investors positive.

Emerging-market spreads are narrowing, while stocks and currencies have just clocked up their biggest weekly rally since early November. And a Bloomberg foreign-exchange index that measures carry-trade returns from eight emerging markets, funded by short positions in the dollar, just climbed for a fourth week, its longest winning streak in almost a year.

“The US dollar has now peaked, Fed policy has turned and China is responding to slower growth momentum with monetary and fiscal stimulus,” said Paul Greer, a London-based money manager at Fidelity International who is overweight developing-nation credit, currencies and local bonds. “All of these factors, coupled with cheap valuations and a recovering oil price, should be supportive for EM risk-asset performance.”

By the way, with Turkey’s economy sliding toward a recession, most economists expect the central bank to keep interest rates on hold Wednesday. The South African Reserve Bank and Bank Indonesia will likely do the same the following day.

Trade blow

December trade figures from China on Monday will be closely watched even as the US and China wrapped up three days of mid-level talks last week in Beijing on a positive note. November data showed export growth slowed following months of front-loading as the trade dispute with the US intensified Goldman Sachs Group Inc. raised its forecast for the yuan as it factored in a weaker dollar and possible pickup in Chinese activity“While talks can still falter and a deal that rolls back existing tariffs and removes trade uncertainty feels like a high bar, the risk of another escalation in tariffs looks to have declined along with US stock prices,” strategists including New York-based Zach Pandl wrote in a report The yuan had its largest weekly gain since 2005 last week

Brazil’s pension overhaul

Investors will probably get more details this week about Brazil’s overhaul of its pension system as Economy Minister Paulo Guedes readies a final proposal to President Jair Bolsonaro Expectations that Brazil’s leader will move quickly to fulfill one of his main campaign promises, a big step toward improving the nation’s fiscal accounts, helped lift the benchmark stock index to a record this year and also buoyed the currency Bolsonaro is likely to sign off on the Guedes draft before heading to Davos later this month, setting it up for a congressional vote in February.

© 2019 Bloomberg L.P