Argentina

Emerging Markets Gripped by Greed Now Turn to Fed for Fresh Spur

A trader views speaks on a mobile phone on the main trading floor of the Warsaw Stock Exchange in Warsaw, Poland, on Tuesday, May 24, 2011. Photographer: John Guillemin/Bloomberg
A trader views speaks on a mobile phone on the main trading floor of the Warsaw Stock Exchange in Warsaw, Poland, on Tuesday, May 24, 2011. Photographer: John Guillemin/Bloomberg

(Bloomberg) -- Traders are likely putting their trust in the Federal Reserve to provide the next spur to an emerging-market rally that may be showing signs of fatigue.

With Friday’s declines delivering a week-ending jolt to the bulls, some of the warning signs took on a more worrying look. The Bloomberg Barclays local-currency bond index registered its first back-to-back weekly drop since June. Bloomberg’s Fear-Greed indicator for the MSCI developing-nation stock gauge -- which measures selling strength versus buying strength -- climbed to its highest in almost a decade, a sign that gains may have been excessive. And a basket of currencies had its worst week since the end of October.

Which is why an assurance from the Fed on Wednesday that it will keep the stimulus spigot open via an unaltered bond-buying program could be enough to comfort investors concerned about the delays to a global recovery.

“Because of continuing Covid-19 disruption, the recovery in emerging-market growth will, of course, be a stop-start one,” said Hasnain Malik, the Dubai-based head of equity strategy at Tellimer. “But pauses in emerging-market equity performance, particularly in Asia, should be viewed as opportunities.”

A slew of economic output data from countries including South Korea, Poland and Mexico this week will give further evidence of the damage from the pandemic. Excluding China, emerging-market activity fell to about 77% below its pre-virus level in the third week of January, according to Bloomberg Economics estimates.

Investor anxiety, as measured by implied volatility for currencies and stocks, jumped on Friday by the most in about two weeks. Just 24 hours earlier, optimism over additional U.S. stimulus under President Joe Biden had helped drive a gauge of developing-nation equities to an unprecedented high.

Tensions between the world’s two largest economies may also be on the radar this week, with the U.S.-China Economic and Security Review Commission due to hold a hearing on Thursday. The commission is mandated by Congress to report annually on the national security implications of the economic relationship between the two countries.

Economic Pulse

  • As the focus shifts away from U.S. politics and more governments impose lockdowns to fight the spread of Covid-19, several countries are set to report fourth-quarter growth data
  • Bloomberg Economics expect South Korea’s gross domestic product data to come in significantly below consensus, arguing that private consumption will be the main drag on growth, as the year-end virus surge and tightened social distancing measures weigh on incomes and spending
  • Figures from the Philippines on Thursday are expected to show continued significant year-over-year contraction
  • Taiwan’s data will be released on Friday, with economists surveyed by Bloomberg expecting a 3.45% year-over-year rebound for the fourth quarter
  • Poland’s gross domestic product published on either Wednesday, Thursday or Friday is forecast to have contracted 2.7% in 2020, compared with a 4.5% expansion the year before
  • A preliminary reading of Mexico’s fourth-quarter gross domestic product on Friday will probably show the economy is recovering, while remaining below pre-pandemic levels

Central Banks Decide

What to Watch

  • Vietnam’s twice-a-decade National Congress kicks off on Monday. Bloomberg economics expects the leaders to allow more flexibility in the dong’s exchange rate
  • Russian assets may be under pressure after supporters of opposition leader Alexey Navalny held the country’s biggest anti-Kremlin protests since at least 2018
  • Turkey will hold exploratory talks with Greece in Istanbul on Monday as the two countries seek to defuse years of conflict over sovereignty and energy rights
  • South Korea’s January consumer confidence is out on Wednesday. The lockdown may have continued to impact sentiment, which slumped in December
  • The Philippines’ December trade data Wednesday are likely to show a continued deficit and slow recovery in export growth
  • China’s industrial profit growth for December is forecast to show continued rapid expansion; the data is due on Wednesday
  • The Thai manufacturing production index for December is likely to come in close to flat after trade data on Friday surprised with exports rising more-than-expected
  • Malaysia trade data will be released on Friday and are expected to show a near record surplus of about 25 billion ringgit, according to economists surveyed by Bloomberg
  • Russia’s industrial output due Monday is likely to show a further contraction in December from a year earlier
  • South Africa’s trade balance data for December published on Friday are set to show the country’s surplus narrowed
  • Data due Friday will probably show that Turkey’s trade deficit narrowed in December
  • A release of Mexico’s November economic activity index on Monday and retail sales on Tuesday may also add fresh evidence of the country’s economic rebound
  • Readings of Chile’s December retail sales, unemployment and copper production in be released on Friday
  • In Brazil, investors will scrutinize a reading of the bi-weekly consumer-price index on Tuesday for further evidence of a pick-up in inflationary pressures after the central bank adopted a more hawkish tone last week

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