Emerging-market rally may hinge on stimulus. Just not too much

Emerging markets will again be looking to central banks to provide the next leg-up in a rally that’s making it the best September so far for stocks and currencies since 2013.

That’s assuming there’s no conflagration between the US and China over trade, no panic over the slump in Saudi Arabia's oil production, and no signs that global growth is slowing more than anticipated. The Federal Reserve and Bank of Japan decisions on Wednesday and Thursday will be key to sentiment, while a string of economic reports from China will also be a major driver. Not forgetting interest-rate decisions in Brazil, South Africa and Indonesia.

“Continued easing in the context of growth stabilisation would likely be a very compelling setting for emerging markets,” said Morgan Harting, a New York-based money manager at AllianceBernstein, which manages $581 billion. “However, to the extent central banks deliver more stimulus than expected because growth is worse than expected, it would be hard to see emerging-market assets delivering very strong returns.”

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Developing-nation stocks, as measured by a MSCI index, climbed for a fourth week to break above their 200-day moving average on Friday, heralding further gains. Meantime, a gauge of emerging-market currencies approached its 50-day average after advancing 1.6% since end-August. The European Central Bank said Thursday it would restart quantitative easing.

“While much of the chatter will be about the Fed, more and more emerging-market investors are likely to pick up on this and reduce underweights,” Harting said. “To the extent we start to see greater evidence of stabilization in EM activity and the forward-looking earnings outlook, I think EM could begin to outperform meaningfully.”

Rate-Cut Debate

• Brazil’s central bank is expected on Wednesday to cut interest rates by half a percentage point to an all-time low of 5.50% to support growth

• Economists surveyed by Bloomberg predict the Selic rate will end the year at 5%

• The real was the second-worst performing emerging-market currency in the past month

• Brazil’s Senate will vote this week on a landmark pension overhaul bill, a key step for investors betting on structural reform in Latin America’s biggest economy

• South Africa’s policy decision on Thursday has analysts and the market more divided than usual. Just three out of 14 economists in a Bloomberg survey predict the central bank will lower its benchmark rate by 25 basis points to 6.25%, with the rest forecasting a hold. Yet forward-rate agreements are pricing a 68% chance of a 25-point cut

• A stronger rand and inflation below the mid-point of the target range would bolster the case for easing, making Wednesday’s inflation print more significant than usual. Consumer-price growth probably quickened slightly to 4.2% in August, from 4%

• The central banks of Indonesia and Taiwan will probably hold their policy rates, with the former having already eased at its two previous policy meetings

• Bank Indonesia’s expected decision is predicated on allowing the bank to assess the impact of previous cuts and to provide a buffer for future policy accommodation, according to Sanjay Mathur, the chief economist for Asean & India at Australia & New Zealand Banking Group Ltd. in Singapore

• Indonesia’s bond market has attracted around $1.6 billion foreign money so far this quarter, higher than the previous three months with cumulative inflows of $1.5 billion

• Ghana’s central bank will also probably keep its benchmark rate unchanged

Economic Pulse

• With a conclusive end to US-China trade tensions nowhere in sight, investors will be scrutinizing China’s industrial production and retail sales figures, which are both expected to rebound from the month before

• China will announce its September loan prime rate for the 1-year and 5-year tenures, following the unveiling of the new benchmark lending rates in August. Consensus is that the People’s Bank of China will announce a five basis-point reduction to both tenures

• Indonesia and Taiwan exports are expected to fall in August from a year before, both recording their 10th consecutive month of declines, as US-China trade tensions bite

• Thailand also releases its data for last month, with July seeing its first positive growth print in four months

• The Philippines publishes July overseas remittances and August balance of payments figures

• Argentina’s gross domestic product data due Thursday will probably show the nation remained mired in a recession during the second quarter. A jobs report the same day may also flag an increase in unemployment for the same period. On Friday, Argentina’s will release its budget balance report for August, after a month of politically triggered market turmoil

• The next tranche under the International Monetary Fund’s $57 billion Argentina bailout risks being delayed to after the presidential elections in October, the Financial Times reported, citing people with knowledge of the talks

• Peru publishes its July economic activity index data on Monday. A positive reading would support expectations for improved growth in the second half

• Traders will watch Poland’s inflation data for August on Monday, followed by last month’s wages and employment statistics on Wednesday, industrial output and PPI on Thursday, and retail sales on Friday. Poland will also hold its second and last switch-bond auction for the month on Thursday