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

(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. 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.”

World’s Economic Recovery Gets Delayed by Slow Vaccine Rollouts

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
  • The won has been emerging Asia’s worst-performing currency so far this year
• Figures from the Philippines on Thursday are expected to show continued significant year-over-year contraction
  • The data may come in below consensus because of “prolonged movement restrictions and limited fiscal support,” according to Bloomberg Economics. In addition, a spate of strong typhoons in October and November likely added further downward pressure
• 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
  • The numbers will be buoyed by “strong export performance, while private consumption also rebounded, in part thanks to the government’s cash vouchers and tourism subsidies,” according to Barclays
  • The authorities’ battle against local-currency appreciation continues, with a clamp down on grain companies and their banking partners
  • December industrial production numbers are also due on Monday, with the consensus expecting the year-over-year rate to cool
• 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

• Hungary’s central bank is predicted to leave its benchmark rate unchanged at 0.6% on Tuesday
  • The forint is the best-performing emerging-market currency this year
• Policy makers in Colombia will probably leave interest rates on hold on Wednesday during their first meeting under new central bank Governor Leonardo Villar
  • Bloomberg Economics expects the decision to be split, as it was in December, with a few policy makers voting for a 25 basis-point cut
• While Chile’s central bank is expected to keep its key policy rate steady on Wednesday, investors will be watching for any hint on the future path of policy

What to Watch

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