US Federal Reserve Chairperson Jerome Powell. (Photo: Alex Wong, AFP)
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Investors will be hanging on Jerome Powell’s every word this
week for clues as to whether the current nervousness gripping emerging markets
With stocks and currencies across the developing economies
on the retreat, the Federal Reserve chairman’s address at the Kansas Fed’s
annual Jackson Hole gathering on Friday will be key to gauging whether US
policy makers will add to July’s so-called hawkish rate cut.
Signs of further easing may help reverse losses that have
made some emerging-market assets cheap relative to their likely returns,
according to Morgan Stanley.
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“Policy action, including from the Fed, and natural
cyclical forces should eventually help activity to recover,” strategists
including London-based James Lord said in an emailed note dated August 18.
“Emerging-market risk assets tend to overshoot and
undershoot fair value, with particularly large downside moves in the
May-to-October time frame,” they said, adding that more time and lower
valuations are needed to win back investors.
With concern growing that the global economy is headed for a
recession, emerging-market sovereign bond spreads are on course for the biggest
monthly increase since 2012, while the average yield on hard-currency
securities rose last week by the most since in a year. Estimated
price-to-earnings ratios for stocks are near the lowest level since January.
READ: Shackles are off for EM central banks after Fed’s
Local-currency bonds in developing markets are doing better,
with a Bloomberg Barclays index showing the higher-risk debt of nations less
impacted by turmoil overseas are continuing to benefit from the collapse in
global bond yields.
Egypt reigns supreme in that category, with debt yielding an
average 16%, the most in the developing world after Argentina, according to the
index. Even if the north African nation meets expectations with a 100
basis-point cut to its key interest rate on Thursday, its inflation-adjusted
rate will remain among the highest in the world. Indonesia and Zambia will also
decide on monetary policy this week.
Markets will have a chance Monday to react to Argentine
Economy Minister Nicolas Dujovne’s weekend decision to resign. Dujovne, who led
bailout negotiations between Argentina and the International Monetary Fund last
year, justified his departure by saying the government needs “significant
renewal in the economic area” following Mauricio Macri’s defeat to leftist
Alberto Fernandez on August 10. The peso last week weakened the most since 2015.
The trade dispute between the US and China will continue to
be a focus for markets after President Donald Trump said he had a call coming
soon with his Chinese counterpart, Xi Jinping. Beijing vowed retaliation for
the looming US tariffs, which it said was a violation of the accords reached
between the two leaders.
South Africa President Cyril Ramaphosa is due to respond to
lawmakers’ questions in Parliament. He will be asked about the funding he
received for his 2017 campaign to win leadership of the ruling African National
The easing cycle
Egypt will probably reduce its deposit rate to 14.75% on
Thursday. Goldman Sachs Group, which also sees 100 basis-point cut, said the
central bank has repeatedly stated its view that maintaining ‘a positive’ real
rate is appropriate.
Bank Indonesia’s policy meeting on Thursday will be closely
watched after three Asian central banks – India, Thailand and the Philippines –-
cut interest rates earlier this month, with two of them delivering more
dovish-than-expected decisions. Economists are almost split on the central bank’s
The monetary authority has been intervening to maintain
stability in the rupiah, which has weakened 1.6% this month.
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Samsung over tariffs
Data from Brazil are forecast to show below-target
inflation, reinforcing bets of further rate cuts after the economy probably
fell into a recession in the second quarter. Swap rates are pricing in 75 basis
points of easing through the end of 2019.
Brazil-watchers will also track the government’s reform
agenda as lawmakers debate a tax overhaul bill.
Investors in Mexico will watch inflation data for clues as
to whether Banxico will cut borrowing costs again in September after it reduced
rates last week for the first time in five years. An assessment that growth
stalled should be confirmed by final gross domestic product data due on Friday.
In South Africa, data Wednesday may show inflation slowed to
below the mid-point of the central bank’s target range, providing some room for
policy makers to support the economy with a rate cut in coming months. The rand
is the worst-performing emerging-market currency this month after the Argentine
The minutes of the latest meeting of Bank of Thailand’s
monetary policy committee will be released on Wednesday. They may give further
insights into how aggressive the easing cycle will be after authorities
unexpectedly lowered the benchmark rate on August 7 for the first time in more
than four years.
Thailand is set to report on Monday slower growth in the
second quarter amid an escalation in the trade dispute between the US and
China, a worsening drought and currency gains that have curbed exports and
tourism. The median estimate of a Bloomberg survey of economists predict GDP
grew 2.3% in the second quarter from a year earlier, compared with 2.8% in the
Trade data from Taiwan, South Korea and Thailand due this
week will shed more light on how the trade war is hurting key Asian economies.
Investors hopeful of policy easing in Poland over the next
12 months will have plenty to chew on. Poland’s statistics office will present
July wages and employment data on Tuesday, followed by industrial output and
PPI print on Wednesday, and retail sales on Thursday, the day the central bank
will release minutes of the last policy meeting.