Emerging markets on edge as Goldman and Deutsche Bank flag risks

Bloomberg September 28 | Updated on September 28, 2020 Published on September 28, 2020

Investors bracing for higher price swings

Emerging markets are heading toward the end of the third quarter with more reasons to be cautious than optimistic.

Developing-nation stocks, currencies and bonds had their worst week in the five days through Friday since the coronavirus pandemic rocked global markets in March. The gap between implied volatility in emerging-market currencies and their Group-of-Seven peers is at the widest since June amid concerns over renewed lockdown measures and delays to further US fiscal stimulus.

Also read: Asian shares rise on stimulus hopes

Manufacturing reports from China, India, Brazil and South Africa that are being published this week are potentially less decisive for investors than the global sentiment toward risky assets. Investors are bracing for higher price swings around the US November elections, with the first presidential debate between Donald Trump and challenger Joe Biden scheduled for Tuesday.

Defensive stance

And they’re being encouraged to move to the sidelines. Deutsche Bank AG is taking a more defensive stance on emerging-market credit as it expects increased volatility from the US election to fuel a sell-off in risky assets. Never mind that the wave of central-bank stimulus and investors hunger for yield had lifted developing-nation dollar debt for five months.

Goldman Sachs Group Inc is asking investors to put their money into high-yielding currencies, such as the Mexican peso, the South African rand and Russian ruble, but only once the dust settles. Expectations for swings in the those currencies against the greenback rose by the most among peers last week.

“With the broad dollar still volatile, and risks still in focus, it is likely too early to engage in fresh longs,” Goldman Sachs strategists, including New York-based Zach Pandl, wrote in a note.

Central banks in India and the Philippines are both forecast to keep interest rates on hold on Thursday, as they balance the need for additional stimulus against a backdrop of rising market volatility. Turkey and Hungary unexpectedly increased borrowing costs last week to support their weakening currencies.

Also read: RBI likely to hold repo rate steady

Adding to the risk-off mood in early trade in Asia, the Turkish lira fell to a record on Monday. Azerbaijan and Armenian forces engaged in fierce clashes Sunday with Turkey backing its ally Azerbaijan, saying it was ready to offer assistance.

The fear is that Turkey, whose economy is on its knees and is actively engaged in escalating conflicts in northern Syria, and with Greece in the Mediterranean, could get dragged into yet another regional conflict it can ill afford, either politically or economically, said Jeffrey Halley, senior market analyst in Singapore at Oanda.

Rate decisions elevated

Inflationary pressures are likely to constrain the ability of the Reserve Bank of India to ease policy, according to Bernard Aw, principal economist at IHS Markit in Singapore. “We expect the central bank to continue to boost liquidity through other measures, such as cutting the cash reserve ratio, he wrote in a research note.

The Philippine central bank may lower its benchmark by another 25 basis points, though it’s more likely to move in November or even later to have more impact as the economy reopens more fully, Citigroup Inc. economists including Johanna Chua in Hong Kong wrote in a report.

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Published on September 28, 2020
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