Trump. Trade. Turkey.
A trio of risks confronts emerging markets in the coming week following a period in which prices have stuck to the August script, with implied currency volatility increasing in the five days through Friday by the most since the March rout.
Donald Trump’s executive actions announced Saturday will likely provide the initial focus for traders. 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 in an interview with Bloomberg Television.
The trade picture may be more worrisome. The potential for U.S.-China tensions to escalate further with a planned review of their phase-one trade deal around Aug. 15 will probably damp risk appetite. Trump’s move to ban U.S. citizens from doing business with the TikTok and WeChat apps pressured developing-nation stocks, currencies and local-currency bonds on Friday.
“U.S.-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 the Covid 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%. Stocks as measured by MSCI Inc.’s index tumbled Friday, trimming the week’s advance to 1%. 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.
Investors pulled money from exchange-traded funds that buy emerging-market stocks and bonds last week, ending four weeks of inflows that reached $2.4 billion.
This article originally appeared on Bloomberg.
