TEHRAN (Iran News) – Emerging markets head into the final full week of the first half buoyed by the confidence the global liquidity rush will keep risk assets supported even as the COVID-19 pandemic shows no signs of letting up.
Developing-nation stocks are approaching their highest level since March, while dollar-denominated bonds have just clocked up an eighth week of gains, Bloomberg reported.
The tidal wave of central-bank stimulus sweeping the world and a potential easing of US-China trade tensions have overshadowed concern that a second wave of the virus will set back economic recovery.
“All that matters is that there is so much liquidity that it has to go somewhere and emerging-market assets are clearly benefiting from that,” said Piotr Matys, a strategist at Rabobank in London. “Nothing seems to influence the markets in a negative way for longer than a day or two.”
Even as markets remain resilient, JPMorgan Chase & Co.’s measure of implied volatility for developing-nation currencies rose for a second week, the first back-to-back increase since March. Adding to the uncertainty, the MSCI Inc.’s emerging-markets stocks index appears capped below its 200-day moving average.
“Confidence is obviously very strong these days,” Matys said. “But, it can suddenly evaporate without any warning.”
The Turkish lira and Mexican peso lagged behind their peers last week as economists predicted the two nations’ central banks will cut interest rates further to stimulate their economies.
The International Monetary Fund will release updated global economic forecasts on Wednesday that will probably be even worse than its projections in April.
Turkey’s central bank will probably cut rates by 25 basis points on Thursday, after lowering them by a cumulative 1,575 basis points over the previous nine meetings.
“The room for further easing is narrowing if the central bank wants to preserve positive real interest rates,” Bloomberg Economics said in a report. The central bank expects inflation to settle at 7.4 percent by year-end.
Mexico’s monetary authority will probably cut its benchmark by 50 basis points on Thursday to help offset the economic drag of the pandemic. Investors will watch consumer price index data on Wednesday for clues to the central bank’s path.
Eastern Europe on hold
After Russia’s central bank shook up the market with its biggest rate cut in five years on Friday, things should calm down on the policy front in Eastern Europe.
Hungary’s central bank will set the guidelines for monetary policy in the next three months, with investors focusing on whether it will stick to its rosy forecasts for economic growth this year. With key rates forecast to remain unchanged, any suggestions on the outlook for borrowing costs set at weekly tenders may influence the forint.
The Czech central bank is expected to hold rates at 0.25 percent after the steepest cuts in the European Union. With the benchmark near zero, the regulator is assessing the economy and policy options for the scenario of a worsening outlook.
Asia may pause
Central banks in Asia may refrain from further easing this week, figuring they have already done enough to support growth and it’s time to take a step back and assess the pace of recovery.
Bank of Thailand, which meets Wednesday, will probably stay on hold until next quarter especially after the May decision to cut rates to a record-low 0.5 percent was an almost split vote. The wild card is the baht, which has surged more than five percent this quarter, testing the central bank’s patience after it warned of risks from further appreciation
The rate outlook is more uncertain in the Philippines with about half of economists in a Bloomberg survey predicting the key rate will be left at a record low Thursday, while the rest see more easing. Governor Benjamin Diokno has said it may be better to keep the rate at the current level for now to ensure there’s enough ammunition in case the outlook deteriorates.
“There’s too much liquidity in the system, so we have to seriously look at whether there’s a need for an additional cut in reserve requirement,” Diokno said Monday.
Argentina extended a deadline for bondholders to accept a debt restructuring proposal for a fifth time, until July 24, after talks with creditors broke down.
The nation is forecast to announce first-quarter growth and unemployment figures on Tuesday, which will probably reflect the economic impact of pandemic lockdowns. Budget balance data for May is also expected by Wednesday.
Data and events
China kept its loan prime rates unchanged Monday. The rates are the basis for pricing corporate and household loans.
“The authorities are likely waiting for previous rate cuts to translate into lower corporate funding costs before they make further cuts,” Bloomberg Economics said in a note. “We still expect the one-year LPR to decline gradually over the course of the year”
South Korea export figures released Monday showed shipment declines eased in June. The numbers are seen as a bellwether for regional trade, and improving exports may boost the won, which is among the top performers in Asia this month.
Brazil’s central bank will release its June meeting minutes on Tuesday, which may offer insight for its 75 basis-point rate cut.
Investors will also watch for the monetary authority’s quarterly inflation report on Thursday for clues on the path going forward. IPCA inflation figures for the first part of June, also due on Thursday, may flag signs of deflation, which would create room for policy makers to provide even more stimulus.
South African Finance Minister Tito Mboweni will present his adjustment budget on Wednesday, detailing the fiscal response to the coronavirus pandemic.
Mboweni said last week South Africa must cut spending to avoid a sovereign debt crisis within the next four years, and added that the Treasury plans to make “very serious and unusual changes” to its expenditure plans.
- source : Iran Daily, Irannews