(Bloomberg) — Traders across the world may be coming around to the idea that the U.S. election isn’t going to be the tumultuous event it was once expected to be.

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But the real believers seem to be in emerging markets.

Optimism that the November election result will go uncontested and speculation a U.S. stimulus package will be agreed whatever the outcome are damping concern about fluctuations through year-end. Yet, while U.S. VIX futures declined last week as bets on likely price volatility eased, the drop was slower than for emerging markets.

“It does appear that emerging-market investors are slightly more sanguine about risks through the end of the year than what you’re seeing in developed markets,” said Nick Stadtmiller, a strategist at Medley Global Advisors in New York. “As long as global liquidity remains ample, and as long as global markets at least hold their ground, I would expect emerging-market assets to perform well. Yields on many emerging-market assets are high, especially relative to rock-bottom yields on developed market assets.”



chart: EM volatility index trades at a discount to the VIX gauge for U.S. stocks


© Bloomberg
EM volatility index trades at a discount to the VIX gauge for U.S. stocks

Falling volatility may give investors more confidence to put cash into an asset class enjoying one of its best phases since the virus-induced global sell-off in March. Citigroup Inc. said last week the worst is over for developing-nation assets and Morgan Stanley is betting volatility will continue to ease as the outcome of the November vote becomes clearer.

Emerging-market equities and currencies climbed to an eight-month high on Friday, while local-currency bonds had their best week since May on the prospect of U.S. fiscal stimulus. One-month implied volatility on the Brazilian real, South African rand and Russian ruble fell by the most among peers last week, signaling improved appetite for risk assets.

“The markets are positioned themselves for a fresh dose of fiscal stimulus and former VP Biden winning the election and on the top of that Democrats regaining control over Senate,” said Piotr Matys, a strategist at Rabobank in London. “Even if there is no agreement ahead of November 3, the markets know that it is just a matter of time when a fiscal package will be implemented.”

Listen: EM Weekly Podcast: China FX Rule Changes, Central Bank Meetings

Rate Decisions

Bank Indonesia’s rate decision comes on Tuesday. Consensus heavily favors no change as policy makers seek to protect the rupiah. However, the acute need for domestic stimulus, plus the fact that headline inflation has been below the central bank’s target range for five months may mean that a cut is consideredThe rupiah appreciated by more than 1% last week, and is currently comfortably stronger than the central bank’s perceived stress point of 15,000 per dollarOn Thursday, Indonesia will report September trade numbers. A continuation of the Covid-induced import slump should keep the trade account in surplusBank of Korea meets Wednesday and is unanimously expected to stand pat. With rates close to the effective lower bound, the hurdle to further easing is highKorean won one-month NDFs posted Asia’s strongest performance last week as odds shifted more decisively toward a Joe Biden election victory and yuan appreciation spilled overThe Monetary Authority of Singapore meets Wednesday. Consensus also favors no changeIn much of Asia, central bank intervention decisions are influenced by the trade-weighted exchange rate and the economic cycleTherefore MAS’s forward-looking policy setting approach can influence perceptions of the most highly cyclical Asian currencies –- such as the won, Taiwan dollar, Malaysian ringgit and Thai bahtChile’s central bank is expected to keep its key rate at 0.50% on Thursday, and refrain from announcing new quantitative-easing measures, according to Bloomberg Economics. The peso was the best-performing emerging-market currency last quarter, according to data compiled by BloombergUganda will also decide on monetary policy on Thursday, and Sri Lanka on Friday

Cheaper to Short

China’s policy makers acted to restrain a rally in the yuan by removing rules that made betting against the currency expensiveFinancial institutions will no longer need to set aside cash when purchasing foreign exchange for clients through onshore currency forwards, effective from Monday, the People’s Bank of China said on the weekendThe offshore yuan reopened 0.7% weaker on Monday morning. It recovered a little after the 9.15am official fixing rate was less weak than some traders has feared, despite being below Bloomberg consensus. Past rule changes have tended to see greater divergences of the fixing from expectations and were generally accompanied by interventionChina will publish trade data on Tuesday. The healthy trade surplus has been part of the strong yuan story, and consensus forecasts predict another 10% year-on-year increase in exports to leave the surplus near $60 billionInflation data are due on Thursday. The headline rate is expected to dip below 2% year-over-year for the first time since February 2019Monetary data are due sometime in the week. Aggregate financing is expected to show a slowdown from the rapid clip last month

Economic Data

Malaysia announces August industrial output on Monday. Consensus expects a drab outcome of close to zero year-over-yearOn Monday, India releases September CPI data. The outcome is expected to remain above the Reserve Bank of India’s 6% year-over-year tolerance for the sixth month. This has prevented the RBI from making the rate cuts the economy needs, and has apparently increased its tolerance for rupee appreciationIndustrial production for August is also due Monday, and is expected to show a continued steep year-over-year declineSeptember trade balance will be reported ThursdayThe rupee was little changed last week, making it Asia’s laggard after the central bank on Friday signaled more policy easing ahead and announced a slew of liquidity steps to support an economy. The Monetary Policy Committee retained the benchmark repurchase rate at 4%, as expected, while keeping its policy stance accommodative, implying it could ease againThe Philippines’ remittance growth numbers for August are scheduled to be released on Thursday. Consensus expects growth of roughly 5% year-over-yearThe peso’s 0.3% gain last week was the second least among emerging-Asian currenciesTurkey reports its current-account balance for August on Monday, followed by industrial production TuesdayThe lira is the worst performer in emerging markets this month, even after the central bank unexpectedly hiked its one-week repo rate by 200 basis points in September and authorities unwound a number of trading restrictions on the currencyAzerbaijan and Armenia continued to report violations of a Moscow-brokered cease-fire, although major military engagements appeared to remain on hold SundayPoland presents its August current-account balance on Wednesday, followed on Thursday by the flash CPI reading for September, and by last month’s core CPI print on FridayRussia may report year-to-date budget balance; also September industrial production, producer prices on Thursday and FridaySouth Africa has August manufacturing and mining production Monday and Tuesday, followed by retail sales Wednesday and second-quarter non-farm payrolls ThursdayA reading of Argentina’s September inflation, scheduled for Wednesday, will probably show an annual decrease, according to economists surveyed by Bloomberg. The nation is also expected to release budget balance data this week. Bloomberg Economics recommends watching the central bank as it tries to stem the depletion of international reservesMexican industrial production data for August, to be released on Monday, will probably flag a decline from a year ago despite a small recovery from earlier in 2020The Mexican peso has outperformed all of its peers this month as investors bet that increased stimulus under a Biden presidency will help boost exports to the U.SIn Brazil, investors will watch August economic activity figures on Thursday for signs of a rebound in gross domestic product in the third quarter. The nation may also seek to stifle any debate over the government’s new social program and spending cap until after local elections in mid-NovemberThe real was the biggest gainer in emerging markets last weekA reading of Peru’s August economic activity gauge on Thursday will probably flag an even deeper contraction than a month earlier, according to economists surveyed by BloombergColombia is expected to post retail sales numbers on Thursday that may give money managers more insight into the nation’s consumer appetite amid the pandemic

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