(Bloomberg) 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 U.S. fiscal stimulus.
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 U.S. November elections, with the first presidential debate between Donald Trump and challenger Joe Biden scheduled for Tuesday.
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 U.S. election to fuel a selloff 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 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.
