Emerging markets will again be looking to central banks to provide the next leg-up in a rally that’s making it the best September so far for stocks and currencies since 2013.
That’s assuming there’s no conflagration between the US and China over trade, no panic over the slump in Saudi Arabia’s oil production and no signs that global growth is slowing more than anticipated. The Federal Reserve and Bank of Japan decisions on Wednesday and Thursday will be key to sentiment, while a string of economic reports from China will also be a major driver. Not forgetting interest-rate decisions in Brazil, South Africa and Indonesia.
“Continued easing in the context of growth stabilisation would likely be a very compelling setting for emerging markets,” said Morgan Harting, a New York-based money manager at AllianceBernstein, which manages $581bn. “However, to the extent central banks deliver more stimulus than expected because growth is worse than expected, it would be hard to see emerging-market assets delivering very strong returns.”
Developing-nation stocks, as measured by a MSCI index, climbed for a fourth week to break above their 200-day moving average on Friday, heralding further gains. Meantime, a gauge of emerging-market currencies approached its 50-day average after advancing 1.6% since end-August. The European Central Bank said on Thursday it would restart quantitative easing.
“While much of the chatter will be about the Fed, more and more emerging-market investors are likely to pick up on this and reduce underweights,” Harting said. “To the extent we start to see greater evidence of stabilisation in EM activity and the forward-looking earnings outlook, I think EM could begin to outperform meaningfully.”
Brazil’s central bank is expected on Wednesday to cut interest rates by half a percentage point to an all-time low of 5.50% to support growth. Economists surveyed by Bloomberg predict the Selic rate will end the year at 5%. The real was the second-worst performing emerging-market currency in the past month Brazil’s Senate will vote this week on a landmark pension overhaul bill, a key step for investors betting on structural reform in Latin America’s biggest economy.
South Africa’s policy decision on Thursday has analysts and the market more divided than usual. Just three out of 14 economists in a Bloomberg survey predict the central bank will lower its benchmark rate by 25 basis points to 6.25%, with the rest forecasting a hold.
Yet forward-rate agreements are pricing a 68% chance of a 25-point cut. A stronger rand and inflation below the mid-point of the target range would bolster the case for easing, making Wednesday’s inflation print more significant than usual.
Consumer-price growth probably quickened slightly to 4.2% in August, from 4%. The central banks of Indonesia and Taiwan will probably hold their policy rates, with the former having already eased at its two previous policy meetings.
Bank Indonesia’s expected decision is predicated on allowing the bank to assess the impact of previous cuts and to provide a buffer for future policy accommodation, according to Sanjay Mathur, the chief economist for Asean & India at Australia & New Zealand Banking Group Ltd in Singapore. Indonesia’s bond market has attracted around $1.6bn foreign money so far this quarter, higher than the previous three months with cumulative inflows of $1.5bn Ghana’s central bank will also probably keep its benchmark rate unchanged.
With a conclusive end to US-China trade tensions nowhere in sight, investors will be scrutinising China’s industrial production and retail sales figures, which are both expected to rebound from the month before China will announce its September loan prime rate for the 1-year and 5-year tenures, following the unveiling of the new benchmark lending rates in August.
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