(Bloomberg) -- The risks across emerging markets would be enough to occupy the minds of traders even in a normal week -- from debt sustainability and increased fiscal pressures to rising Covid-19 infection rates and geopolitical tensions.
But none of these will come close to capturing their attention as much as the result and aftermath of Tuesday’s U.S. election and what it means for global risk appetite.
Gauges of developing-nation stocks, currencies and local bonds had their worst weekly performance in more than a month in the five days through Friday as concerns over an unclear or contested outcome grew amid a surge in Covid-19 infections and record early voting. Investors have already positioned for a Democratic sweep of both the White House and Congress which will allow them to pass significant fiscal stimulus, lifting developing-nation currencies to a fifth month of gains in October, the best streak since 2017.
“As general nervousness levels rise -- absent a blue wave or Democratic sweep -- the prospect of a contested election is real,” said Ehsan Khoman, the head of Middle Eastern research at MUFG Bank in Dubai. “Such an outcome, which is far from a tail risk and, critically, how to hedge against this prospect, is top of the mind for emerging-market investors.”
Last week’s selloff in technology stocks and fresh coronavirus-related lockdowns across Europe are also adding to investors’ caution. Underscoring those anxieties, a measure of implied volatility for emerging-market stocks last week reached the highest level since June.
For some bulls though, any pullback in the market would offer a buying opportunity as they wager on an economic recovery and the prospect of a Covid-19 vaccine next year.
“The U.S. election is obviously a big event risk, but irrespective of the outcome, global fiscal taps are wide open and a Covid vaccine is not far,” said Nader Naeimi, head of dynamic markets at AMP (OTC:AMLTF) Capital Investors Ltd. in Sydney. “Further weakness in emerging-market stocks is likely, but that will be a once-in-a-generation opportunity to get on board the markets and sectors that have been left behind.”
Investors will also turn to central-bank decisions this week for clues on the next phase. The Federal Reserve is widely expected to hold fire on any additional stimulus measures in the midst of the election. Elsewhere, central banks in Malaysia, Poland and the Czech Republic will also decide on policy.
Rate Decisions
- The Malaysian central bank is expected to leave rates unchanged on Tuesday. Upbeat language in the most recent policy statement in September has the majority of analysts leaning toward Bank Negara standing pat. However, the fact that inflation continues to fall, and given that the Covid situation has forced the introduction of a conditional movement order, makes a 25-basis-point cut possible
- The budget on Friday is a key test of the government’s majority -- failing to pass the bill would be perceived as equivalent to losing a no-confidence vote, although the king’s support may boost the prime minister’s chances
- Read: Two Key Events May Add to Malaysia Spread Widening: SEAsia Rates
- The ringgit and bonds were stable last week
- Central banks in Poland and the Czech Republic may not announce further stimulus at their meetings, for now, despite spiraling infection rates and government restrictions aimed at curbing the virus
- Policy makers may wait for the European Central Bank’s review scheduled for December before adjusting financing conditions of their own
- Russia’s central bank will release its quarterly monetary policy report on Monday
- The ruble had its biggest weekly loss since March in the five days through Friday as oil sank below $40 a barrel
- In Turkey, investors will be on the lookout for signs of further tightening by the central bank after the latest “stealth measure” failed to prevent the lira from suffering its steepest monthly decline in October since a rout two years ago
- The central bank ended access to liras from the cheaper Borsa Istanbul repo market, the latest “stealth measure” to tighten policy without resorting to an outright policy-rate hike
- Brazil’s central bank will release minutes from its October meeting on Tuesday, which may help traders understand why officials surprisingly kept the door open for further rate cuts
- Industrial production figures for September are expected to show the recovery from pre-pandemic is complete, according to Bloomberg Economics
- October inflation data, scheduled for Friday, may show further pressure on food prices
Colombia’s central bank meeting minutes, which are expected on Tuesday, will give more details on why officials held rates unchanged on Friday, putting an end to the easing cycle that began at the start of the year
- Consumer price inflation figures on Thursday may show a decline in September
Data and Events
- Manufacturing PMIs across Asia for October will be released on Monday. Of late, however, these diffusion indexes don’t seem especially helpful in gauging relative activity. In North Asia, where there is more reliance on technology and superior Covid control, countries have not enjoyed the same PMI boost as seems apparent in industrial production and exports, for instance
- Services PMIs for both China and India are due to be released on Wednesday
- A slew of Asian countries including Indonesia, South Korea, the Philippines, Thailand and Taiwan will be releasing their inflation data in the week
- Indonesia’s CPI should remain below the central bank’s tolerance range for the fifth consecutive month
- The South Korean won suffered its first losing week in five last week as global virus concerns undermined Asia’s strongest currency in October
- The Thai baht was stable last week, with better-than-expected manufacturing numbers being canceled out by an uptick in global pandemic concerns and lingering political upheaval
- Indonesia’s 3Q GDP will be released on Thursday
- The rupiah was emerging Asia’s best-performing currency last week after the Thai baht
- Philippines’ September trade balance is due on Wednesday
- The Philippine peso eked out gains after a relatively strong week for equity inflows
- Read: World’s Biggest Storm in 2020 Slams Into Philippines
- China’s 3Q current-account numbers will be released on Friday, while trade figures are due on Saturday
- Read: China’s Factory Outlook Steadies as Recovery Stays on Track
- The yuan weakened last week as geopolitical tension increased with the U.S. over Taiwan. In addition, the authorities said that they would phase-out the counter-cyclical adjustment factor in determining the official Beijing 9:15 a.m. yuan fixing. This should have the short-term impact of making speculators close out their long yuan positions to account for the greater future volatility
- In Chile, a reading of September’s economic activity on Monday is expected to show an annual decrease as the pandemic continues to spread
- Inflation figures for October, to be released on Friday, will probably also fall from a month earlier, according to economists surveyed by Bloomberg
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