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End of easing cycle makes time difficult in emerging markets

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(Bloomberg) – September is shaping up to be the month when the dial of the interest rate compass no longer points so sharply south for developing economies around the world.

Of the six major emerging market central banks due to decide their policy in the coming week, only one – the South Africas Reserve Bank – is expected to cut borrowing costs, continuing a trend that has seen Malaysia, Peru , Ukraine and Chile keep rates unchanged. this month.

The waning willingness of policymakers to cut interest rates – not to mention their ability to do so – underscores the growing recognition in developing countries that after the wave of stimulus launched through these economies amid the Covid pandemic -19, inflation is down slightly. again. This is an achievement illustrated by a surge in demand for inflation-linked bonds from emerging markets, which has pushed the yields of some notes to historically low levels.

For BNP Paribas SA, the lack of strong reporting at the end of the policy easing cycle means that the focus must be on finding value. The bank is reducing its exposure to Brazilian rates and credit while reducing its allocation to sovereign credit in developing countries to almost zero in its recommended model.

Despite favorable financial conditions and abundant dollar liquidity, the risk-return of maintaining a substantial long allocation in risky emerging market assets is no longer attractive, wrote Gabriel Gersztein, Head of Global Markets Strategy. emerging at BNP Paribas, based in Sao Paulo. in a report. We have now moved to a more selective approach, in which idiosyncratic factors and political events play an increasingly important role in our trade choices.

And there are many country-specific risks to be aware of. The Moodys Investors Service on Friday reduced Turkey’s debt to the lowest level ever granted to the country, warning of a possible balance of payments crisis. In Peru, President Martin Vizcarra pushes back an impeachment attempt that has made the ground in recent weeks the biggest decline in emerging markets. And Russian President Vladimir Putin, grappling with the fallout from the suspected poisoning of opposition leader Alexey Navalny, tightens his grip on Belarusian President Alexander Lukashenko as the dictator steps up the crackdown on protests.

Emerging market stocks ended a bad week on Friday on a positive note amid a selloff in US tech stocks. Currency and bond indices were little changed as some investors braced for the two-day federal reserves policy meeting starting Tuesday.

South Africa to cut

  • With the South African economy mired in the longest recession since 1992, the majority of economists forecast a 25 basis point cut in interest rates on Thursday to close a cycle that has already seen five cuts totaling 300 basis points this year. year.
    • Nation reports retail sales for July a day earlier
    • The implied volatility of the three-month rand against the dollar rose for a third week in the five days to Friday, the longest period since March.
  • Bank of Russia likely to keep benchmark borrowing costs unchanged on Friday
    • Optimism about the pace of the recovery reduces the urgency of another rate cut, while the fall in the ruble could raise concerns about financial market stability, Bloomberg Economics said in a report.
    • Russia announces PPI for August Wednesday, followed by gold and foreign exchange reserves on Thursday
  • Poland will likely hold interest rates at a meeting on Tuesday
    • Nations’ current account balance likely narrowed in July as exports increased more than imports, data may show on Monday
    • Poland also releases data on inflation for August Wednesday, employment and wages on Thursday and producer prices on Friday.
  • Bank of Indonesia expected to hold on Thursday as pressure remains on national currency

    • The rupee was the worst performing in the Asian sphere last week following renewed foreclosure measures in Jakarta, despite central banks’ pledges to defend the currency.
  • Taiwan’s central bank is also expected to remain on hold Thursday

    • The Taiwan dollar has remained around the 29.5 level over the past week, although intra-day movements have continued to widen
  • Brazil’s central bank will likely keep the policy rate unchanged at 2% on Wednesday, and investors will analyze the newly established forecast for clues as to how long rates will remain at an all time high.

    • Latin America’s largest economy will also release tax collection figures for August this week.
  • Minutes from Chiles’ central bank meeting in September could suggest the possibility of slowly raising interest rates at the end of its two-year forecast period, although policymakers will likely maintain an accommodating tone. and will reiterate their commitment to provide additional accommodations if necessary, according to Bloomberg Economics

Turkeys disorders

  • Turkish markets could be under pressure on Monday after Moodys downgraded its credit rating to B2, five levels under the investment grade and on par with Egypt, Jamaica and Rwanda
  • Nations alongside investors suffered as its leader, Recep Tayyip Erdogan, pursued an approach that prioritized growth. Country credit default swaps, local currency debt and the lira were the worst performers in emerging markets this quarter
  • Turkey provides data on industrial production on Monday, home sales and the budget balance on Tuesday and net bond investment by foreigners on Thursday

Other data and events

2020 Bloomberg LP



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