0742 GMT October 01, 2020
US President Donald Trump’s executive actions announced Saturday will likely provide the initial focus for traders, Bloomberg reported.
Though the president’s four orders include continued expanded unemployment benefits and a temporary payroll-tax deferral for some workers, they will probably only provide temporary relief from the effects of the coronavirus pandemic and may jeopardize talks with congressional Democrats over a wider package.
“Until Congress comes to a determination by its own, this is sufficient to keep demand going over the next three to four months,” Luciano Jannelli, the head of investment strategy at Abu Dhabi Commercial Bank PJSC, said.
The trade picture may be more worrisome. The potential for US-China tensions to escalate further with a planned review of their phase-one trade deal around August 15 will probably damp risk appetite. Trump’s move to ban US citizens from doing business with the TikTok and WeChat apps pressured developing-nation stocks, currencies and local-currency bonds on Friday.
“US-China relations remain a wild-card risk, where the scope and extent of escalation remains difficult to handicap,” Morgan Stanley strategists, including New York-based Matthew Hornbach, wrote in a report. “An increase in tensions that spill over from the diplomatic relationship to the economic relationship and/or the trade deal could be an important risk-off event for markets.”
And then there’s Turkey, where a roller-coaster week saw the lira slide to a record low versus the dollar after authorities stepped back from interventions and relaxed some of the restrictions that tethered the currency for months. Regulators on Friday also announced a tax exemption for foreign-exchange sales by Turkish institutions to foreign financial firms, while Borsa Istanbul introduced an index-linked circuit-breaker system.
“Amid August illiquidity, a discontinuous move in the lira would still reverberate across emerging-market high-yield markets as investors would likely worry about ‘the next domino to fall’ as a result of COVID-19 crisis,” Goldman Sachs Group Inc. strategists, including New York-based Zach Pandl, wrote in a note. They identified the South African rand, Brazilian real, Russian ruble and Mexican peso as the most vulnerable.
The lira weakened the most in emerging markets last week, dropping 4.2 percent. Stocks as measured by MSCI Inc.’s index tumbled Friday, trimming the week’s advance to one percent. The dollar bonds of developing nations rose on average for a 15th week, the longest streak since 2009. The Bloomberg-Barclays Index of local bonds slipped for the first week in seven.
Mexico, Egypt decide
● Mexican policy makers will probably cut the key rate for a 10th straight meeting on Thursday to 4.5 percent, as the economy teeters on the edge of the worst recession in almost a century. The rate is still among the world’s highest in real terms, which has helped the currency rebound from some losses in recent months
● Peru’s central bank will probably hold rates steady at a record low of 0.25 percent, also in a Thursday decision. The bank hasn’t ruled out further cuts
● Egyptian policy makers will probably preserve one of the world’s highest inflation-adjusted interest rates when they meet on Thursday. With the central bank keeping borrowing costs on hold since an emergency cut in March, the nation has attracted carry-trade investors again. Adjusted for prices, Egypt’s rates are the highest along with Malaysia’s among more than 50 major economies tracked by Bloomberg
● Brazil will release the minutes of last week’s central bank rate decision on Tuesday. The bank cut the nation’s benchmark Selic rate to an all-time low of two percent, and said it may consider another small cut in the future
● Still, Bloomberg Intelligence forecasts China inflation will fall to zero by year-end
● On Friday, industrial production, retail sales and fixed-asset investment are all expected to show further improvement
● At some point during the week, China will also report July money-supply and loans-growth data. Aggregate financing is expected to slow significantly after rapid growth in the first half. China’s five-year bond yield rose by 11 basis points last week, reflecting the economic recovery
Other data and events
● India reports June industrial production on Tuesday. The consensus expects a more than 20 percent year-over-year contraction. Later in the week, July trade numbers will be released, with the trade balance likely to show continued improvement versus 2019. On Thursday, a report is expected to show July CPI rose at a faster rate. India’s 10-year yield got a bump after Reserve Bank of India’s surprise decision to hold rates steady last week, which reflected such inflation concerns
● Malaysia is scheduled to release its second-quarter gross domestic product report, which is expected to show a double-digit year-over-year contraction. Current-account figures will also be released on Friday. The ringgit was Asia’s best-performing currency last week as bonds rallied
● Pakistan’s B3 debt rating, with a stable outlook, was confirmed by Moody’s Investors Service over the weekend, concluding the assessor’s review for a downgrade initiated in May. The nation’s five-year credit-default swaps have fallen by about 115 basis points since the March rout to 580 basis points on Friday
● Russia’s economy probably shrank by 9.6 percent year on year in the second quarter amid the nationwide lockdown, data may show Tuesday. The ruble has been one of the worst performers in emerging markets in the past month
● Elsewhere, Poland’s economy is forecast to have contracted nine percent in the same period, while Ukraine’s probably shrank 10.5 percent
● Colombia will probably say on Friday that GDP plunged by more than 10 percent in the second quarter. The economy is in the deepest slump in more than 100 years. Colombia will also report economic activity figures on Friday
● Brazil, whose currency was among the world’s worst performers last week, will release June retail sales figures on Wednesday. Sales have dropped for three months
● Argentina will publish inflation figures on Thursday. Its debt was trading below the value established under last week’s restructuring accord, with many investors skeptical the government has negotiated enough fiscal legroom to pull the economy out of a recession