Emerging Markets Are Awash in Confidence

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Emerging markets head into the final full week of the first half buoyed by confidence the global liquidity rush will keep risk assets supported even as the Covid-19 pandemic shows not 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. The tidal wave of central-bank stimulus sweeping the world and apotential easing of U.S.-China trade tensions have overshadowed concerns that a second wave of the virus will set backeconomic 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 peers last week as economists predicted the nations’ central banks will cut interest rates further to stimulate their economies. The International Monetary Fund will releasenew global economic forecasts on Wednesday that will probably be even worse than its projections in April.

More Easing

  • Turkey’s central bank will probably lower interest rates by 25 basis points on Thursday, after a cumulative 1,575 basis points in cuts over the previous nine meetings since July
    • “The room for further easing is narrowing if the central bank wants to preserve positive real interest rates for investors,”Bloomberg Economics said in a report. The central bank expects inflation to settle at 7.4% at the end of the year

    Eastern Europe on Hold

    • After Russia’s central bank shook up the market with itsbiggest 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 the authority will stick to itsrosy 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 will likely keep interest rates unchanged at 0.25% after the steepest rate cuts in the European Union. With rates near zero, the regulator isassessing the economy and policy options for the scenario of a worsening outlook

    Asia Pauses

    • 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 the 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% was an almostsplit vote, according toBloomberg Economics. The wild card is the baht, which has surged more than 5% this quarter, testing the central bank’s patience after it warned of risks from further appreciation
    • Philippine policy makers will probably leave their benchmark unchanged at a record low Thursday, according to HSBC Holdings Plc and Citigroup Inc. Governor Benjamin Diokno has said it may bebetter to keep the rate at the current level for now to ensure there’s enough ammunition in case the economic outlook deteriorates.
      • “Bangko Sentral ng Pilipinas is expected to take a pause and like to shape the relative outperformance of the peso,” Citigroup said in a note. The bank is relatively bullish on the peso, which earlier this month advanced to the strongest level since January 2018

      Argentine Impasse

      • Argentinaextended a deadline for bondholders to accept a debt restructuring proposal for a fifth time, until July 24, after talks broke down
      • The nation is also expected to post 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