Emerging Markets at Mercy of U.S. Growth as Investors Weigh Bets

Netty Ismail, Aline Oyamada and Lilian Karunungan
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Emerging Markets at Mercy of U.S. Growth as Investors Weigh Bets

(Bloomberg) -- Emerging-market investors will be looking for more evidence that the U.S. economic turnaround is gaining traction if the lackluster end to last week hasn’t already burst their balloon.

Indexes of developing-nation currencies and bonds declined in the holiday-shortened week, while stocks ended on a down note as worse-than-expected data from Europe failed to sustain optimism triggered by signs of a pick-up in China. The U.S. will on Friday unveil its first estimate of gross domestic product data for the quarter ending March 31.

The dollar has remained resilient despite the Federal Reserve’s shift to a dovish tilt, limiting gains in emerging-market currencies that may have allowed central banks in developing economies to soften policy faster. Turkey, Russia, Indonesia, Colombia are set to maintain interest rates this week, though Ukraine may ease, economists predict.

“The emerging-market outlook is still encouraging, but there will probably be a break after the impressive recent rally,” said Richard Segal, a senior emerging-markets analyst at Manulife Asset Management in London. “At least until there is more clarity about the U.S., Germany and Chinese economies.”

Growth in developing nations continues to outpace developed economies, and emerging-market assets have historically outperformed in such an environment, said Shamaila Khan, the New York-based director of emerging-market debt at AllianceBernstein Holding LP.

Yields are attractive compared with developed markets and major headwinds have ebbed, with progress in U.S.-China trade talks and improving data from the world’s second-largest economy, Khan said. Citigroup Inc.’s emerging-market economic surprise index climbed last week to the highest in almost a year.

But idiosyncratic weaknesses abound. Risk reversals show that traders are the most bearish on the Turkish lira amid concern over the state of the country’s finances and the prospect of more political upheaval.

Turkey’s Troubles

President Recep Tayyip Erdogan said on Friday it’s time to leave disputes over last month’s municipal elections behind, the clearest sign yet that he might be ready to concede defeat in IstanbulErdogan was confronted with a rare sign of rebellion within the governing party as former allies attacked his leadership following a sharp deterioration in the economy and stinging losses in local elections The lira is set to remain under pressure amid speculation that the central bank is borrowing to boost its reservesWhile the central bank will probably keep rates unchanged on Thursday, investors will “read its statement more closely than ever given the uncertainty about how it calculates” its net and gross foreign reserves, said Segal at Manulife Asset And as Turkish banks begin reporting first-quarter results, investors will likely take the opportunity to not only assess whether non-performing loans are “close to peaking, but also quiz them about this reserves confusion,” he saidRead more: Why’s Everyone Worried About Turkey’s Foreign Reserves?

Brazilian Vote, PDVSA Payment

Brazilian lawmakers will once again attempt to complete a key vote on pension reform on Tuesday. They failed to do so last week, a delay that dealt another setback to President Jair Bolsonaro. Assets have already weakened as political noise increases around the overhaul, seen as key to fixing the nation’s finances. Another delay could cause the declines to snowballVenezuela bondholders will monitor a meeting, also on Tuesday, in which the opposition-led congressional finance commission is scheduled to discuss a critical debt payment for state-run oil giant PDVSA. U.S.-backed Juan Guaido’s ad hoc PDVSA board has recommended that it be allowed to make the $71 million interest payment due April 29 to save Citgo, Venezuela’s crown jewel abroad, yet it could also face legal challenges in the processInflation probably picked up in both Mexico and Brazil, according to mid-April data set to be released on Wednesday and Thursday, respectively

Treasury Report

The U.S. Treasury is expected to release its semi-annual report on foreign-exchange policy. It maintains a currency-monitoring list of countries it considers to have a significant trade surplus with the U.S., a high current-account surplus or to be intervening in currency marketsNo major trade partner was designated a currency manipulator in the Treasury’s last report in October despite the Trump administration’s criticism of China’s lack of progress in correcting the trade imbalance with the U.S. at the time. Its currency watch list remained the same, naming China, Japan, South Korea, India, Germany and Switzerland.

Ukraine’s Most-Watched Comedian

Volodymyr Zelenskiy, a comedian and political novice, won a landslide victory in Sunday’s presidential runoff as voters vented their frustration at the ex-Soviet republic’s lack of progress since a revolution five years agoThe central bank is set to cut its key rate on Thursday amid slowing inflationForeign investors have doubled their holdings of the nation’s local-currency government bonds in the past month, lured by high yields and cautious optimism around Sunday’s presidential runoff

Sri Lanka Blasts

Sri Lanka sought to reassure investors as bonds and the rupee tumbled in the wake of the weekend terrorist attacks that claimed the lives of at least 290 peopleTellimer, a brokerage formerly known as Exotix Capital, is cautious on equities, even though they offer “deep value”

--With assistance from Ben Bartenstein, Alec D.B. McCabe, Philip Sanders and Karl Lester M. Yap.

To contact the reporters on this story: Netty Ismail in Dubai at nismail3@bloomberg.net;Aline Oyamada in Sao Paulo at aoyamada3@bloomberg.net;Lilian Karunungan in Singapore at lkarunungan@bloomberg.net

To contact the editors responsible for this story: Dana El Baltaji at delbaltaji@bloomberg.net, Justin Carrigan

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